Can the Chancellor deliver for manufacturing in his Spring Statement?
Posted on: March 11th 2022 · read
The UK is the 9th largest manufacturer in the world with an annual output exceeding £190bn and provides over 2.5m jobs. The sector is crucial to the country’s post-Covid recovery and in a world of post-Brexit opportunity, the Chancellor faces a difficult balancing act.
In just over a year companies will see the 2 key tax changes –
- The end of two capital allowances - super deduction and annual investment allowance (at least at its current rate);
- An increase to the main rate of corporation tax.
Companies will also see an increase to the rate of National Insurance Contribution (NIC) in the next few weeks – which for the manufacturing sector is set against a backdrop of supply chain issues (which will worsen as the Ukraine war continues), rising prices and inflation, and the move toward “net zero”. This inevitably all comes at a cost. Yet despite this, the manufacturing sector has just reported that production has hit a seven-month high, and demand and confidence is high. Retaining it as such a level is vital for the UK’s post Covid recovery.
Long term incentives from the Chancellor are needed to ensure manufacturing businesses are planning for the future.
This recent recovery has been led by latent demand in the UK and across the world, but the Government needs to act in the forthcoming Spring Forecast Statement to ensure that this is supported and sustained. It is therefore essential for manufacturers to invest and plan for the long term. An initial call for the suspension of the impending NIC increase is vital so that funds are invested in plant, machinery and buildings which will safeguard and create jobs.
The ending of the unprecedented level of financial support during Covid has been followed by the Recovery Loan Scheme (RLS), however this has not filled the requirement for manufacturers, with various barriers to entry meaning that many SME’s have found it not fit for purpose.
The Chancellor created the temporary Super Deduction capital allowance, allowing 130% relief, but this will end in March 2023 as the main rate of corporation tax increases to 25%, as will the Annual Investment Allowance of £1m. Business planning is a long term exercise but with such short term incentives on the agenda it will mean that manufacturers are making short term decisions leading to adverse consequences in the future, or it will simply leave many businesses unable to take advantage of the reliefs.
It is necessary for such reliefs to be extended or modified so that businesses can plan for longer term investment programmes such as “net zero”. The sector would therefore be looking for incentives toward the journey to decarbonisation because if the manufacturing sector does not lead “net zero” it is difficult to see how such targets will be achieved.
How can your Manufacturing business plan ahead for the Corporation Tax rise?
- Consider your capital investment plans. Many manufacturing businesses are continually upgrading and renewing plant and facilities. There are currently significant capital allowances incentives for new capital investment and this will need to be considered in the context of obtaining corporation tax relief sooner versus potential for relief at a higher rate of corporation tax from 1 April 2023.
- Review your intellectual property. As well as patenting end-products, the manufacturing process itself can also be patented.
The patent box rate for qualifying profits will remain at 10% so the increased main rate will make this even more valuable.
This leads to two considerations: a) are there patents which are being exploited already which haven’t yet been claimed? b) Is there any scope to patent existing intellectual property to allow a patent box claim?
- Revisit your international group. Once established, international structures are rarely revisited but this is a good opportunity to consider if the activities in each country and consequent transfer pricing policy remain appropriate. For manufacturing groups with presence in multiple jurisdictions, there could be benefits in considering where activities are carried out and where the value is created.
- Finally, ensure R&D claims are up to date. R&D relief continues to be valuable with effective relief of up to 32.5p per £1 of spend for SMEs from 1 April 2023 and 9.75p per £1 of spend under the RDEC scheme.
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