car plant

When taxation is a boost for manufacturing

Stuart Weekes, Partner, Corporate Tax
27/03/2019
car plant
A modern tax system has to provide incentives for businesses as well as be a collector of taxes. It should drive and encourage innovation in all sectors.

The manufacturing sector craves enthusiasm and investment from government to enable the sector to flourish and grow and to enable innovation to mature. The sector wants to embrace a culture where failure does not mean trying and not succeeding, but exists when you don’t try at all. The tax system needs to encourage investment and innovation; this will create the culture for manufacturers to develop and grow.

It is positive that the UK tax system does have genuine, legitimate ways for manufacturing companies to claim tax breaks to help fund innovation, development and growth. In an age where the spotlight is on tax avoidance and evasion, and society and governments seek to clamp down, via peer pressure or legislation, on individuals and organisations who they perceive are unfairly reducing their tax bills, it is refreshing to know that tax law also provides great and exciting incentives for manufacturing companies.

Annual Investment Allowance

In the Autumn Budget 2018 the Chancellor announced that the Annual Investment Allowance (AIA) will increase to £1 million for the period 1 January 2019 to 31 December 2020. Many companies may wonder what all the fuss is about.

The AIA is a capital allowance. A capital allowance is the way that companies can obtain corporation tax relief for the cost of investing in plant and machinery. Usually the company claims tax relief for a portion of the original cost (writing down allowance, WDA for short). However this is simply a percentage calculated on a reducing balance basis which means it can take many years to obtain full tax relief for the cost of an asset.

An AIA provides a company the opportunity to claim tax relief much earlier, when the asset is purchased, rather than over many years when the WDA is applied.

Over the years the government has flexed the AIA depending on the needs of the economy. By raising the limit to £1 million the government’s clear message is for manufacturers to invest in capital equipment and to obtain tax relief early, as it’s spent. A great incentive to invest at a time where there might otherwise be reticence, driven by economic and political uncertainty.

Of course, business should invest for commercial reasons and not just for the tax breaks. But being able to obtain tax relief early, is a great sweetener and more manufacturing companies should consider investment carefully as a tool to use in dealing with the strategic and tactical challenges they face. At Crowe, we work closely with our clients to identify and meet these challenges; talk to us about how we can help you.

The manufacturing sector is well-known for being innovative. Innovation drives economy, efficiency, growth and success.

Innovation and R&D

The tax system does reward innovation. Where there are advances in science or technology companies can claim enhanced corporation tax relief for the associated costs. The R&D tax credit schemes are designed to encourage innovative companies and provide a reward in the form of cash payments or reduced corporation tax liabilities. This form of funding is a life line for many companies while others use the tax saving to reinvest in their businesses or fund further research and development.

In the latest statistics from HMRC for tax year ended 31 March 2017, around 40,000 companies made a claim for R&D tax credits, of which around 12,000 were from manufacturing companies.

While this is a high proportion many more companies could make a claim. Valid claims can include advances in products but also in the processes that produce those products.

Eligible companies can claim up to a 33% return on qualifying costs, which is a really attractive return for any company. 

In business all companies should consider what they are doing to keep ahead of the competition. Companies that don’t do this may have greater challenges about the viability of their business model. Companies that are keeping ahead, should then be asking whether what they are doing qualifies for this valuable tax relief. Turning the table around, if they are working to stay ahead of the competition, why wouldn’t they qualify for this relief? Surely every company should at least consider this?

We often call it the ‘head scratch’ relief. If you have to scratch your head to work out how you solve a problem, get ahead, make ‘it’ better faster or more economically, then its highly likely to be R&D. At Crowe, we have a great track record for unlocking R&D relief for manufacturing businesses. Talk to us about how we can help.

Patent incentives

Patents often get a mixed reaction. If you register a patent your idea is in the public domain and you have to be prepared to incur costs to defend if there is a breach. Some companies see this as a barrier to obtaining a patent. However properly prepared a patent can provide good protection for the intangible assets of the business.

The tax system also rewards companies that have patents. Where income is generated from patents registered in the UK, and some other countries, the profits derived from exploiting those patents can have an effective corporation tax rate of 10%. This is called ‘the patent box’.

The statistics to date show that not many companies have claimed this relief. Why is this? Is it not well known or has the cost of producing the financial information in support of a claim outweigh the benefit? In the early days the benefit tapered in over a few years, but now companies can get the full relief and it should make it more attractive to make a claim.

The UK corporation tax rate is currently 19% and unless there are changes in legislation it will reduce to 17% from April 2020. The patent box is therefore still a very attractive proposition and is something that all manufacturing businesses should consider.

History has shown that innovation and thinking ahead of the game usually leads to growth and success. Stagnation inevitably results in failure. Manufacturers need to innovate for success. This is more important as we look to the uncertain future.

Taking full advantage of the tax reliefs and incentives offered by the UK government should be something that all innovative manufacturing companies are doing.

Why wouldn't you?

Talk to us about how to go about getting your products patented and benefiting from the patent box. We have great relationships with expert patent agents who specialise in the manufacturing and engineering sectors.

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This article is featured in our spring newsletter, other topics in this issues covers Brexit, funding options for growth, VAT regime, recruitment post-Brexit and many more articles you will find helpful to your business.

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Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley