Welcome to our July 2023 overview, aimed at equipping UK SME owners with nuanced market insights and technological trends. Here's a deep dive into this month's economic indicators, policy updates, and sector-specific developments.
Economic Metrics and Key Developments
July has been a dynamic month for the UK economy.
The Consumer Prices Index (CPI) rose by 7.9% in the 12 months to June 2023, down from 8.7% in May.
As widely expected, the Bank of England has announced an increase to the Bank Rate of 0.25 percentage points, taking it to a 15-year high of 5.25%. This is the 14th rise in succession since the Bank Rate started its upwards trajectory in December 2021, when it stood at just 0.1%, its lowest level ever.
The Bank expects inflation to fall to 5% by the end of the year, reaching its 2% target by the second quarter of 2025. It acknowledges the pain associated with Bank Rate increases but says the hikes are necessary to defend the overall health of the economy.
The next Bank Rate announcement is on 21 September, with further adjustments due in November and December. The next rate move will be largely determined by the inflation figure for July, which will be revealed by the Office for National Statistics on 16 August.
Taxation and Policy Nuances
As the Science Based Targets initiative prepares to downgrade companies that have failed to comply with its updated methodology, the group faces fresh warnings SMEs and high growth clean tech firms could struggle to verify their net zero goals. Nine UK companies have been singled out by the Science Based Targets initiative (SBTi) for failing to follow up climate pledges with official emissions reduction goals for approval by its reviewers. The move follows a new compliance policy announced by the group earlier this year, whereby the SBTi pledged to highlight which organisations had failed to follow up on their initial public commitment to submit climate goals for official validation by the initiative. Previously, organisations that failed to submit targets within a 24-month window were simply removed from the project dashboard. But the new policy means firms that fail to submit targets for consideration will be named on the platform, increasing the reputational pressure on businesses to make good on their initial promise to submit new emissions targets.
R&D Draft Legislation -
Last month the government published draft legislation to merge Research & Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief. this proposed law aims to create a unified R&D tax relief system, drawing inspiration from the present RDEC structure in the form of an expenditure credit. However, this updated system will have distinct differences from the current RDEC. A significant change is that firms can apply for credits for payments to subcontractors within an R&D initiative, similar to the provisions in the SME program. The anticipated implementation date is on or after April 1st, 2024. Some say that the new rules will prevent claims for subcontracted R&D, meaning the companies that are doing the R&D won’t be eligible to receive the funding for it. Instead, the companies that commission the R&D will. This will cause significant issues for subcontractors.
UK government introduces new tax system on alcoholic beverages -
New government regulations have been introduced in the UK from August 1 which will see alcoholic beverages now taxed on strength. These new regulations mean that many drinks, particularly fortified wines, will cost significantly more while lower-abv products will be cheaper. Draught beer will remain largely untouched under a government scheme to protect pubs. According to the Wine and Spirits Trade Association, drinks below 3.5% abv will be taxed at a lower rate, but tax on drinks above 8.5% abv will stay the same, regardless of the product. As a result, sparkling wine, which was previously taxed at a higher rate than still wine, will be 19p cheaper, for a standard-strength bottle, if retailers pass on the tax changes by lowering prices. Tax on a typical bottle of still wine at 12% abv will go up by almost 50p, while stronger wines at 15% will increase by around £1. Port wine, which sits at around 20% abv, will likely suffer the most with prices expected to rise by around £1.50.
Brexit Regulations
The Latest Updates July has seen its fair share of Brexit-related developments.
The government is reportedly considering further postponements to the introduction of border inspections and controls for animal and plant imports from the EU. A recent article from the Financial Times (3 August) suggests that the impending system for inspecting imports of animal and plant products from the EU, as well as other global regions, which was set to take effect in October of this year, might face additional delays. Initially planned for a 2021 rollout as a post-Brexit adjustment to the UK's trade practices, this system's implementation was pushed back to ensure better preparedness and facilitate a seamless transition. Since January 2021, inspections on goods being exported to the EU have been operational, leading to concerns among some UK food manufacturers about an uneven competitive landscape.
UK lifts strict sanitary controls on Brazilian poultry and beef imports - UK food safety authorities have ended reinforced inspections on Brazilian meat imports and reinstated the establishment approval system. This comes after an audit of Brazil’s sanitary and phytosanitary controls by the government’s Department for Environment, Food and Rural Affairs (Defra). Being approved by the UK for pre-listing of poultry and beef imports is no longer needed and the period of enhanced pre- and post-import testing requirements for salmonella has now ended. The audit focused on the Brazilian system of inspection of products of animal origin, especially poultry and beef. It was the first British audit mission abroad after Brexit.
Innovation Developments
While R&D remains a crucial focus area, the month brought forth notable innovations.
£14 million to unlock agricultural innovation -
More than £14 million is to be made available to unlock innovation and develop solutions in the farming sector in two new research and feasibility competitions under the Farming Innovation Programme, Defra has announced. It is part of the government’s delivery of its commitment to invest £600 million in innovation and productivity in the sector over three years, and adds further support to the development and take-up of innovative practices on farms to boost productivity and sustainability whilst meeting net zero targets. The competitions are open to farmers, growers, foresters, research organisations and businesses involved in agriculture to collaborate on novel ideas and solutions.
Groundbreaking discovery could lead to safer lithium-metal batteries -
Researchers at the California NanoSystems Institute have made a discovery that could lead to better, safer lithium-metal batteries that outperform current lithium-ion batteries.The new research, detailed in a paper in Nature, has the potential to commercialise these batteries and make them safer for use. Metallic lithium reacts so quickly with chemicals that, under normal conditions, corrosion forms almost immediately while the metal is laid down on a surface such as an electrode. This prevents the common use of lithium-metal batteries in everyday technologies such as phones and watches. The researchers developed a technique that prevented corrosion and showed that, in its absence, lithium atoms assemble into a surprising shape — the rhombic dodecahedron, a 12-sided figure.
Sector-Specific Intelligence
- Manufacturing:
The UK sits within the top ten countries for manufacturing output globally, but slow adoption of emerging and Fourth Industrial Revolution technologies (4IR) amongst manufacturers could risk this position.
As it stands, the UK is number 9 in the world, employing over 2.5 million people across the country, but failing to adopt innovation at scale has been highlighted as a significant threat to the UK’s global standing. 94% of UK manufacturers believe the industry has fallen behind the US due to a lack of investment in digital technology, and other major economies are making significant investments in the development and deployment of emerging technologies, to advance the output of their manufacturers.
- Engineering:
Tackling the UK’s shortage of engineering skills requires a holistic approach to address outdated attitudes and stereotypes, says Fraser Robb, managing director of Perega. One in four jobs now advertised in the UK is for an engineer, with demand for the profession set to grow by 2030. This sounds like a positive situation, yet there remains a growing engineering skills gap that seems to be getting larger by the year. According to the OECD, less than 10% of UK graduates are engineers, meaning British companies are fighting over an increasingly small talent pool. The focus should be on School engagement with Engineering skills, apprenticeship schemes and underrepresented talent pools according to Fraser Robb.
Heat pump efficiency is up to four times that of the average gas boiler, according to a new study from Good Energy. The energy provider claims that the average efficiency of the heat pumps it installs in homes is 340 per cent, meaning that 3.4 units of heat are produced for every unit of electricity used. By contrast, the average gas boiler efficiency in the UK is claimed to be just 82 per cent, making Good Energy’s heat pumps 4.1 times more efficient
- Construction:
Housing secretary Michael Gove is under fire after an official document appeared to show him going months without meeting a major housebuilder.
Mace has called on the government to offer tax credits to companies exporting design, engineering and construction services. The contractor, which operates in five continents, says in a new report that the global market for British construction expertise could be worth £11.5bn.
- IT & Software:
Hybrid quantum workflow offers potential for hydrogen fuel cell efficiency.
BMW, Airbus and Quantinuum have collaborated on a project to simulate a reaction that could pave the way to more efficient hydrogen fuel cells.
UK government explores plan to open £160m satellite broadband fund. In a second UK government connectivity funding announcement in two days sees plan to expand space-based broadband and 5G coverage for remote areas.
Outlook
Gearing Up for August As the third quarter progresses, understanding the current market landscape remains pivotal. July's developments, both global and local, underline the need for SMEs to remain agile and informed.
Stay tuned for our August review, continuing our commitment to offer timely and relevant insights for the UK SME sector.
