Exporters who wished to claim Export Innovation Credits (EICs) would send a supplement to their VAT Return which gave their EIC claim and their expenditure on Export Innovation (investment of labour, overheads, materials and expenses in product or market innovation in goods or services intended for export), and their Total Exports over the last 4 quarters. They would have added their EIC claim to box 4 of their Return (The EU might not like this, too bad: it’s an emergency measure) and thus would automatically get the money with no extra admin or systems required by HMRC.
Safeguards would include limiting the cumulative EIC claim to 50% of expenditure on Export Innovation or 25% of the last 4 Qtrs pro-rata Export Value Added (Total Sales less Total Purchases times Total Exports/Total Sales), to ensure the money goes to genuine value-adding exporters. Spot checks would ensure that the Export Innovation claims were genuine, but this is no worse than policing other VAT claims. Total Exports can be checked for plausibility from past VAT returns.
- The EICs are a loan: at the end of 2012/13 the cumulative EIC plus 5% interest is divided into 8 quarterly instalments and paid back (by deductions from Box 4) over the following 2 years. So HMG makes roughly 4% pa on a 2½ year loan, and since 3-year Gilt yields are under 0.5% and the VAT writeoff rate is c.2% this will result in lower total public borrowing by April 2015 even in the absence of any stimulus to the economy.
- But the stimulus would be considerable. Especially for SMEs, a guaranteed 2 ½ year unsecured loan with no fees at 4% pa interest is much cheaper than any other form of finance. This roughly doubles the RoI of investment in Export Innovation. During 2012/13 this scheme could stimulate/protect £5-20bn of business expenditure, and total public sector debt by April 2015 could be reduced by c. £4-30bn.*
- This would also increase the productive capacity of the economy and our long term growth rate. Thus the fall in the structural deficit would be even greater than the debt reduction.
* The total EICs (say £2.5-10bn) would underpin expenditure of £5-10bn but perhaps half would have happened anyway. Still the total tax take from biz expenditure is c 30-50% so this is worth £1-5bn. Expected payback of these investments would probably be under 2 years so assuming 20% margins the total increase in exports over the 3-year period would be about 5x the extra investment (£12-50bn) or a further £3.6-25bn to HMG.
PS A well informed commentator has raised some issues about EICs, and my responses are posted here.