Whilst increasing input costs, wage bills, and interest rate rises are currently squeezing the bank balance, manufacturing business owners need to look forward to the forthcoming end of the tax year to identify potential savings that could be gained by a bit of tax planning.
We now have clarity over tax rates and allowances, following the chaotic yo-yo-ing of rates in 2022, and this allows much-needed stability for forward plans.
Corporation tax
The main rate of corporation tax will increase from 19% to 25% on 1 April 23. Businesses with profits of less than £50,000 will continue to be taxed at 19%, and for organisations, with profits between £50,000 and £250,000 a tapered rate will apply.
The different rates for different financial periods can present a planning opportunity to manage taxable profits.
For example, the timing of certain items of expenditure such as significant plant or factory repairs – if they could be delayed into the next financial period, tax relief would be obtained at the higher rate. Alternatively, there may be an opportunity to accelerate sales contracts to complete sooner and recognize profits at the current 19% rate.
Loss-making manufacturers
Loss-making manufacturers could also be faced with a choice – to carry back losses and obtain relief at 19% or carry forward against future profits at a rate of 25%.
For cash-strapped businesses, this may not be a debate to be had, but for those with decent amounts of working capital, there may be opportunities to amend previous loss relief claims.
Changes to R&D tax reliefs
Many SME manufacturers will be affected by changes to R&D tax reliefs on 1 April 23. The rate at which the R&D relief is calculated will decrease from 130% to 86%, and the rate at which tax credits are paid will decrease from 14.5% to 10%.
Where practical, it will be more beneficial for eligible SME manufacturing companies to bring forward any planned expenditure before 1 April 23 and obtain relief at the higher rate.
Other tax planning habits
If capex plans, productivity, and wage budgets do not allow the flexibility in timing needed to take advantage of the changing tax rates, there are still good tax planning habits to adopt before a financial year-end.
Consideration can be given to pre-year-end pension contributions, which are tax-deductible on a paid basis so must leave the bank before the period end date.
In addition, accounting provisions for future costs can accelerate a tax deduction, provided they are in line with UK GAAP and conditions can be proved to be existent at the balance sheet date. Examples of such provisions can include specific bad debts or write-downs of obsolete and damaged stock items in the factory.
How can MHA help my manufacturing business?
Don’t miss out on potential tax savings for your manufacturing business.
Take action now by working with a financial expert to review your tax strategy and identify areas for improvement before the end of the tax year. Contact us today through the form below to schedule a consultation and secure your business’s financial future.