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BSA gives 2013 Autumn Statement submission

Author : Mark Fox

25 November 2013

Mark Fox, CEO of the Business Services Association, offers BSA perspectives on how, through tax and wider policy changes, the Government and the FM sector can work together to continue the UK economic recovery.

Mark Fox

The Business Services Association – BSA – is a policy and research organisation. It brings together all those who are interested in delivering efficient, flexible and cost-effective services and infrastructure across the private and public sectors. A list of our members is attached to this letter.

I am writing ahead of the 2013 Autumn Statement to offer our perspectives on how, through tax and wider policy changes, the Government and our sector can work together to continue Britain’s economic recovery. Our sector is a pillar of the economy because it:

Is a significant taxpayer: Businesses in the sector pay just under £14 billion per year in the three main businesses taxes. This in turn pays for public services and alone accounts for the spending by the Department for Transport in 2011/12.

Is a large employer: Services in our sector account for over 10% of all the UK’s workforce jobs.

Has an imprint nationwide: Compared to another significant sector, financial services, jobs in our sector are far more evenly spread across the UK. Outside of London, the share of jobs in a region from our sector varies between 7.25% and 13.5% whereas for financial services the variation is between 4.75% and 10%.

Spans the public and the private sector: 64% of services in our sector are performed for private sector clients with the remaining 36% for the public sector. The strength of our sector therefore contributes toward a truly private sector led recovery.

Exports worldwide, making Britain open for global business: In our sector, Britain is a world leader in trading abroad to deliver jobs and pay taxes domestically. Through creating a world class centre for support services BSA members also make Britain an attractive option for Foreign Direct Investment (FDI).

For those companies which are looking to invest here, high quality support services which make it easy and quick to set up a new office are as essential as the availability of the right skills and climate for innovation.

The rate of delivery by external service providers is steadily increasing across both the private and public sectors. For example, the corporate market for bundled services was valued at £9.5 billion last year and is forecast to grow to more than £10 billion next year.

We believe that the 2013 Autumn Statement should make it a priority to create an environment which will help growth continue. Discussions with BSA members highlight the following specific steps which the Government should take to develop its programme of economic growth and public service reform.

Open Public Services
We welcome the Government’s commitment to open up the delivery of public services to a range of providers. No one sector, the private sector, the public sector or the voluntary sector, has a monopoly of wisdom when it comes to service delivery. There are good examples across all sectors. It is the principle of competition that drives efficiency and service improvement, typically leading to savings of between 10 and 30% at the same or better level of quality.

The BSA supports the Government’s Open Public Services agenda. However it is important that, to ensure our public services are as efficient and high quality as possible, this agenda is not allowed to stall. Our analysis of the ‘Commissioned Services’ and ‘Ensuring Diversity of Provision’ elements of the Cabinet Office’s departmental business plan shows that only 17% of projects are complete – compared to a 25.3% completion rate across the Cabinet Office as a whole. This suggests that the Open Public Services agenda is not accorded as high a priority as other areas of the Cabinet Office’s work. Equally, whilst some encouragement comes from the 81% of projects in these two areas which are “in progress,” with only 69% of Cabinet Office projects completed “on time” this status should be greeted with some caution. We look forward to the 2014 update on progress against this agenda and urge the Government to ensure it remains a priority.

One further area where HM Treasury could take decisive action to open up public services is revolutionising how service integration is encouraged across the public sector. Action from the heart of government, where the levers of public spending are controlled, is essential if the efficiencies of service integration are to be fully realised.

Integrating services across public agencies allows for complex and expensive social problems to be solved at an earlier stage. For example, an ex-offender will come into contact with prison, probation services, the local authority, housing associations, the NHS and his or her local job centre. An integrated approach between these agencies, based on outcomes, is better for the user and better for the taxpayer. Without it, opportunities for efficiencies in public services are being missed, as the Communities and Local Government Select Committee reported recently. The Local Government Association has predicted that a roll-out across Britain of initiatives similar to Community Budgets could save between £4.2 billion and £7 billion per annum.

The private sector is extremely well placed to play a role as an integrator of services. BSA members possess a variety of skills needed to join up different agencies, such as managing supply chains, sharing existing assets, ability to access upfront capital, skills in performance management and measurement, and expertise in integration of existing IT systems. Equally, joining up commissioning and budgets across agencies can allow greater use of payment by results, which the BSA supports, as it would allow providers to take greater responsibility for risk as a wider range of services would be under their purview.

Responsible for coordinating the Spending Review process, HM Treasury should take steps to solve two recurrent problems which block progress toward integrated services. Firstly, long-term budgetary planning is needed to facilitate integration. Currently public agencies have varied budget cycles from their sponsor departments. This is particularly a problem where budget cycles are annual, as they are with clinical commissioning groups. Secondly, while all investment in service integration is made at local level, a portion of the savings accrue to central government. This acts as a disincentive.

Ideally a Treasury-coordinated mechanism would be created to hold back a portion of departmental budgets, with payment contingent on cross-departmental collaboration and appropriate financial support of local integrated service arrangements from departments which benefit.

Infrastructure Policy
Britain needs infrastructure investment both for immediate and sustained economic growth. Evidence shows that investing in infrastructure can have a stronger positive effect on GDP per capita than other forms of investment. Chronic underinvestment in UK infrastructure also necessitates investment now – the World Economic Forum ranked the UK 24th in the world in overall quality of infrastructure. A fifth of the UK’s existing electricity generating capacity will shut down over the next decade. Both policy and tax measures (covered later under ‘Infrastructure Tax’) should be dovetailed to catalyse investment.

We recognise and welcome that the Government acknowledges this. Proposed reform of the Highways Agency in line with a fixed funding settlement, boosting capital spending by £3 billion over the next spending round and increased use of government guarantees are important and positive steps in the right direction. The Government’s rolling National Infrastructure Plans are also a welcome development. A clear pipeline is essential to help providers plan and assemble teams and make decisions about how they invest their resources. This results in the public sector receiving higher quality and better value bids.

However, delivery of infrastructure remains a concern. Just 14% of the Government’s infrastructure pipeline projects are listed as having started. Whilst Britain’s democracy based on geographical constituencies, considerable existence of legacy assets and dense population are frequently cited as barriers, nations with similar traits manage to get shovels in the ground and projects up and running faster. There are policy actions HM Treasury could and should take to remedy this.

With private finance required for 60% of HM Treasury’s stated infrastructure pipeline, and with bank lending still difficult to access, in part due to Basel III, Government should take all steps possible to reduce the risk profile of infrastructure projects in order to attract new forms of private investor such as pension funds. The comparative low rate of investment in infrastructure projects by UK pension funds – around 2% of total assets – means that this is still a field of considerable potential. By contrast, pension funds in Canada and Australia invest 15% and 8% of total assets respectively. Whilst the Pension Infrastructure Platform (PIP) is a welcome start, of the £20 billion the UK Government is looking to raise through this scheme, only £1 billion of investment capital has been put forward to date. This suggests that a further policy push is required at Ministerial level.

Pension funds have been reticent to invest in the construction phase of projects. The Government should take steps to improve the rating of these projects to investment grade. Availability of government guarantees to the value of £40 billion is a significant step in the right direction and the recent announcement that a number of projects of reached pre-qualification stage is welcome. However awareness of this initiative remains low and the Government should do more to promote it. Just 8% of respondents to a recent survey believe that the scheme is fully effective – although with 73% considering the scheme partially effective there is clearly considerable potential here.

Providers are willing to take a proactive role in helping the Government make its current guarantees go further without increasing its exposure. Projects should be financed on a programme, rather than individual project, basis (as with the Priority Schools Building Programme) in order to spread the risk and using a provider framework across the whole programme. A condition of joining the framework would be the provision of a private sector financial guarantee.

In addition, the Government should provide a clear pipeline of projects which will use PF2. Whilst the BSA has raised concerns previously regarding the detail of PF2 – in particular how the 18 month procurement guillotine will work effectively within a system which has a legacy of procurement over-runs – we hope that the recent commitment to rolling out PF2 and associated publication of standardised shareholder agreements will lead to increased use of this model. Few projects are currently scheduled to use PF2 and those which were are now relying more on conventional capital spending. For example, 46 schools on the Priority Schools Building Programme will now be built using private finance as opposed to the 219 originally envisaged. If PF2 is to be a viable model, a clear pipeline of projects is required. Otherwise investment expertise will leave the UK for more active infrastructure markets, leaving a vacuum when the Government does seek bidders. Currently infrastructure companies rate Australasia and North America as better destinations for their work and this is a cause for concern.

Infrastructure Tax
The Government should alter the tax regime for infrastructure to encourage investment. In allowances for capital expenditure, the UK ranks second to last amongst OECD countries, with only Chile being worse. Currently, 28% of private sector annual spending on infrastructure is not eligible for tax relief including several projects in the priority areas for the Government such as energy, transport and waste. Whilst HMRC usually cite state aid rules as the rationale for granting such tax reliefs, this is inconsistent with their award for industries like the TV and gaming sector.

In a recent survey of senior tax professionals of the UK’s 57 largest businesses, reliefs for infrastructure and capital investment were the most cited potential growth driver. If introduced they would encourage investment to create 4,000 new jobs across the FTSE 100 alone.

Estimates suggest that a new capital allowance covering those infrastructure assets which do not currently qualify and applying only to future spending, would cost an average of only £200 million per year assuming assets are depreciated over 25 years. We would support the introduction of such an allowance.

Tax environment
We welcome the further proposed reduction to the mainstream corporation tax rate to 20% with effect from April 2015. However, there remains a significant risk that the positive message that this sends to business that the UK encourages profitable business, is being counteracted by the continuing climate on tax avoidance. This is compounded by the additional resulting pressures even for good compliant businesses.

There have been significant changes to the tax system over recent years and we consider that now is a time for a pause in the rate of change. There is a major cost to business in complying with and understanding new tax legislation, particularly if it is complex and constantly changes.

Businesses prefer a steady tax environment so that they can take into account the known tax impacts arising from their business activities as well as any other costs when planning whether to invest or expand their business. Where there is an uncertain tax climate, businesses increase their provisions for potential tax impacts when modelling investment decisions, resulting in reduced investment.

Recently there have been calls for capital gains tax to be extended to non UK residents holding residential property. We stress that any such extension should not include non UK residents holding commercial investment property. This could have a significant adverse impact for infrastructure, as non UK investors would be less likely to invest into UK property assets if they were liable to UK capital gains tax on a subsequent sale. This would send the wrong message, at the very time that private investment in infrastructure is being sought.

We welcome the introduction of a General Anti Abuse Rule (GAAR) aimed at deterring and preventing tax avoidance. However, without a clearance mechanism, particularly for the first few years, there will be heightened uncertainty around the parameters of the new regime which may discourage business activity. We continue to support the call for a clearance mechanism and would suggest consideration is given to a clearance mechanism for a 5 year period until the impact of the GAAR has settled down.

The continuing work of the OECD on addressing base erosion and profit shifting will be closely watched by our members. The work identifies some issues which need to be addressed, particularly in terms of how international rules keep pace with modern business practices. We would urge the government to continue to engage with UK businesses as the project progresses and agree that any action needs to be taken jointly on an international basis. We caution that unilateral action could create double taxation and damage commerce.

Employment taxes
The implementation of real time information (RTI) for PAYE and payroll seems to have gone smoothly for the majority of businesses. We would reiterate our view, however, that the ongoing operation of RTI must be practical for employers and further relaxation of the penalty regime for the first few years to allow RTI to bed in would be welcome.

We would also reiterate our view that RTI and the wider PAYE system must interact successfully with the new statutory residence test to ensure that transitory employees are captured properly by this system.

We also note that HMRC has now published its response to the May 2013 consultation on the use of offshore Employment Intermediaries and have substantially altered the proposed arrangements.

The revised arrangements will potentially place additional burdens on our members especially where they are employment businesses. We understand that HMRC will publish regulations during November and we trust that any changes to the operation of PAYE and Class 1 National Insurance will be made as straightforward as possible for affected businesses.

The BSA continues to fight for a more level playing field between those providing services in-house and those who are able to provide them as an outsourced service, for whom the VAT rules remain a significant barrier to delivering a cost efficient alternative.

We therefore continue to encourage HM Treasury to look at alternative models which, for example, allow outsourcers to receive the same tax reliefs as Trusts undertaking services in-house.

Concerns around the treatment of VAT are becoming prevalent in the heath sector, due to the potentially arbitrary distinctions that are being made between exempt and taxable supplies. We would encourage more joined up planning between the Department of Health and HMRC regarding the significant forthcoming changes in delivery models and the barriers that can arise due to VAT.

Private businesses typically enter into these public private arrangements for lengthy periods, typically at least 10 years, and changes in HMRC policy regarding VAT treatment of supplies can be fatal to business plans. We recommend that HMRC give binding tax rulings so that uncertainties in VAT treatments are reduced.

Where VAT law is changed, for example following EU case law, HMRC should give a long period of consultation, with grandfathering provisions, so that there is time for these public private arrangements to adapt to any change. Ideally, any costs arising from such tax changes should be borne by the public sector party rather than the private contractor.

We welcome the EU Commission’s current consultation on public bodies and the application of VAT exemptions in the public interest. The Commissions’ recognition that the existing VAT system can result in unfair differences in treatment between public bodies and other providers leading to the creation of additional VAT costs can only be seen as a positive development.

Consideration and analysis of the alternative models proposed by the Commission must be followed by decisive action if any progress is to be made. It should also be borne in mind that any changes will require both agreement between Member States and significant amendments to legislation. As such any benefits derived as a result of the Consultation are unlikely to be felt in the market place for a number of years.

In conclusion, the BSA is wholly in support of the Government’s stated focus on fostering economic growth and we look forward to working with you in the coming months to carry this forward.

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