BUDGET 2010

Submission from the Chemical Industries Association

The Chemical Industries Association is the organisation that represents chemical and
pharmaceutical businesses throughout the United Kingdom. In this submission, we are
calling for:

 Finance and credit availability for essential investment for the future.
Government must continue to use all means available to it to ensure that
business has access to finance at competitive rates – particularly critical as we
emerge from recession. In this respect, the Budget should increase the Annual
Investment Allowance to £150,000.
 A more competitive and simplified business taxation regime that helps
incentivise companies to invest in the UK. The introduction of the Patent Box
is a welcome step in this direction but we believe it should be implemented
earlier than the proposed 2013. The proposed increase in National Insurance
will damage job prospects and government should target a phased reduction in
corporation tax to 25% by 2015 and then 20% by 2019.
 Energy supplies that are reliable, secure, sustainable and competitively
priced. Against this backdrop, we believe that the proposed reduction in the
rebate on the Climate Change Levy for Climate Change Agreement
participants - from 80% to 65% - should be limited to what is strictly required
by the EU Energy Tax Directive (ETD). Our calculations suggest that the
relief for electricity could remain as high as 90% in still meeting the ETD. A
higher rate of relief for electricity could in turn neutralise the impact of the
proposed reduction in relief for gas.

Our submission is based on the principle that our industry is a wealth creator for the
UK. Support for industry improves the economic capability of the country to meet the
social and environmental needs of the people of the UK. The adoption of our
proposals would improve the prospects of our businesses in providing quality jobs,
environmental and low carbon solutions; and enhancing further our positive
contribution to the economy of our country.
Chemical and pharmaceutical businesses in the UK

Chemical and pharmaceutical businesses in the UK are part of a £60 billion industry.
We are a significant part of the UK’s manufacturing base and a provider of essential
inputs to most of the rest of manufacturing activity. Every working day in 2009 our
sector has added £30 million to the UK balance of trade, while the rest of
manufacturing has shown a £300 million deficit.

The jobs of 600,000 people in the UK depend on the chemical and pharmaceutical
industry. Workers in our industry perform high quality, skilled jobs reflected in pay
levels that are 20% higher than other manufacturing sectors. Chemicals and
pharmaceuticals has an average value added per employee of £92,000, almost double
that of the rest of manufacturing.

The products of our companies are leading the fight to deliver a greener existence for
all – from building insulation and components through to light-weight materials for
vehicles.

Seventy per cent of chemical and pharmaceutical businesses in the UK are foreign
owned, so the UK must not only be, but be seen to be, a better place to invest and
manufacture than our competitors. The UK as a place to do chemicals business lies at
the very heart of our attached manufacturing strategy, launched in November 2009 in
the presence of Lord Mandelson.

Finance and credit availability for essential investment for the future

Industry needs to invest regularly in anticipation of demand from customers and to

improve its efficiency, including energy and raw material usage, and thereby maintain
its competitiveness. Right now investment is critical as we try to emerge from
recession. If investment levels cannot be sustained, our competitive position is at
greater risk. In order to invest, money has to be available at an affordable price.

Businesses are struggling to obtain adequate working capital, let alone investment
funds. Financial markets remain far tighter than normal. We ask that Government
continue to use all means available to it to restore commercial lending to normal
prudent levels. Specifically to encourage investment it would help if - from the
limited resources available - the Budget could increase the Annual Investment
Allowance to £150,000. This would be more meaningful for an industry such as ours,
which has high levels of capital investment. Even a temporary increase would be
helpful.

A related problem with origins in the tightness of liquidity concerns trade credit
insurance, which is still often unavailable or prohibitively expensive. We remind
Government that this issue remains a significant concern to many businesses in the
UK, including those of strategic importance to the country. During 2009, OFGEM
played a helpful role in bringing the respective parties together – insurers, energy
suppliers and customers – and we ask that both Government and OFGEM keep this
issue on their radar.
A competitive and simplified UK business tax regime to promote the UK as a
preferred business location

Businesses can and should contribute to the society in which they operate, not only by
providing good employment opportunities but also through taxation. At the same
time, government must allow business to operate profitably and grow. By doing that
Government will ultimately gain more in sustainable taxation revenue and jobs will be
created.

We of course lobby for favourable taxation rates for our member companies but we
fully acknowledge the need for fair taxation.

In the UK there are three challenges. First, the comparable taxation rates and
incentives in competitor countries are providing greater incentives to invest outside
the UK. Second, the UK has one of the most complex business taxation structures in
the world. Third, there is a political temptation to tax business rather than individual
citizens.

Simplification of taxation could be achieved at no net loss of revenue through a

reduction in headline rates and corresponding withdrawal of exemptions.
We welcome the proposed Patent Box scheme as an example of how to match the
kind of incentives for local investment in R&D and intellectual property. We should
like to see its introduction brought forward. On the other hand, the proposal to
increase levels of National Insurance charges will weaken the UK’s position, and we
ask that it be dropped.

In the longer term we would like Government to state its intention to reduce levels of
corporation tax as soon as the public finances permit, with targets of 25% by 2015,
and 20% by 2020.

Energy supplies that are reliable, secure and competitively priced

Like all UK manufacturers we depend on secure energy supplies at competitive

prices. New technologies are certainly needed, but the costs of the many subsidies
being given – not least to inherently unreliable wind power – and then financed by
levies on users are undermining and even threatening our competitiveness. Our
products, moreover, are enablers of novel energy saving applications throughout the
economy. The Pre-Budget Report’s announcement of penalizing energy saving
businesses through a too high reduction in the Climate Change Levy rebate from 80%
to 65% is an unnecessary action by Government. Specifically, any reduction in the
rebate on Climate Change Levy given for sector Climate Change Agreements should
be strictly limited to that required to comply with the minimum EU energy tax. CIA
has submitted detailed arguments in a separate letter to the Economic Secretary. A
copy is attached.

The Chemical Industries Association was one of the first signatories to a Climate
Change Agreement, and over a 16-year period we have delivered a 35% energy
efficiency improvement. In view of the environmental benefits from Climate Change
Agreement energy savings we believe that the associated relief from the Climate
Change Levy is essential for sustaining energy intensive businesses exposed to
international competition.

In order to invest in the UK, business needs to be given the confidence that the many
projects to build energy infrastructure proposed by Government will be successfully
delivered. For the UK to be a viable place to invest we need:

 Gas storage facilities urgently provided

 Funding for research into carbon capture and storage technology for new coal
power stations
 Measures that provide energy security prioritised over subsidies to meet
renewable (in practice mainly wind) energy targets
 Tight limits on how much of the cost of subsidies for low carbon energy falls
on industrial users. Present proposals threaten to add over 70% to wholesale
electricity prices by 2020
 The imminent Renewable Heat Incentive to be financed to avoid industry
being driven offshore.

Despite our energy intensity, the chemical and pharmaceutical industry is an essential
enabler of a low carbon future for the UK economy. A recent report by McKinsey
and Company found that for every 1 unit of Carbon Dioxide or equivalent greenhouse
gas (CO2e) emitted in chemical industry production processes the resulting products
enable savings of 2-3 units of CO2e emissions during their lifetime use. In other
words McKinsey calculates that in 2005 without the innovative products of the
chemical industry there would have been 8 to 11% more emissions of CO2e.
Throughout 2010, the Chemical Industries Association will be working to highlight
the specific UK contributions to this outstanding performance.

For more information contact Simon Marsh

020 7963 6725 or marshs@cia.org.uk