The latest tax changes have brought significant implications for manufacturing and engineering businesses from both a planning and compliance perspective. Manufacturing and engineering businesses are heavily based on capital investment and innovation. In this regard there have been significant changes announced in respect of capital allowances and R&D tax relief. These changes, combined with the increase in the rates of corporation tax (CT), make it important for such business to plan.
As of April 1, 2023, the CT rates have increased for companies. The rate applicable is dependent on their profits. They are now as follows:
- A main rate of 25% on all taxable profit where this exceeds £250k
- Where profits do not exceed £250k a small profits rate of 19% applies to the first £50k of taxable profit and marginal rate of 26.5% applies to taxable profit between £50k and £250k
We also see a return of the associated companies rules meaning these thresholds are divided by one, plus the number of associated companies. The increase to CT rates means the following should be considered when carrying out remuneration planning:
- For some, owner managers’ bonuses may be more tax efficient than dividends particularly where there are profits in the range of 50k to 250k (26.5% effective tax rates)
- Some may prefer to revert from dividends to salary and consider higher employer pension contributions (subject to certain limits)
In terms of tax incentivisation for capital expenditure, the super deduction which gave a 130% deduction for qualifying plant expired on March 31, 2023. The super deduction gave companies an effective rate of relief of 24.7%. However, ‘full expensing’ has been introduced for companies incurring expenditure on new plant and machinery between April 1, 2023 and April 1, 2026. This means companies will be able to claim a 100% first-year allowance (FYA) for qualifying plant and machinery (excluding cars). The effective rate of relief of full expensing based on the new main rate of CT is 25% and therefore, whilst the super deduction was abolished, companies are not in a worse position. A 50% FYA for other plant and machinery including long-life assets and integral features (known as special rate assets) will operate along similar lines. Full expensing and the 50% FYA are only available for companies and not for unincorporated businesses.
In addition, the annual investment allowance (AIA) limit which provides 100% relief for qualifying expenditure was set to reduce from its temporary £1m limit to £200,000 on April 1, 2023. However, the government have announced that the annual investment limit will remain at £1m and that this limit will be made permanent.
The 100% FYA for electric vehicle charging points has been extended to March 31, 2025 for corporation tax and April 5, 2025 for income tax.
There have also been changes to R&D Tax relief with effect from April 1, 2023. The rate of relief due under SME scheme will be less generous, with the additional deduction being reduced from 130% to 86%. The SME credit for loss-making companies has reduced from 14.5% to 10%. However, the 14.5% credit will still apply if at least 40% of the company’s expenditure is on R&D. The RDEC scheme is now more generous, with the credit increasing from 13% to 20%. The RDEC scheme generally applies to large companies but can also apply to SMEs that have grant funded or subsidised R&D activity.
Other announced changes to the R&D regime include expanding qualifying expenditure to include the costs of data sets and of cloud computing. All claims for R&D reliefs will have to be made digitally and be accompanied by a compulsory additional information form. Companies will also need to notify HMRC that they intend to make a claim within six months of the end of the period of account to which the claim relates, generally if they have not made an R&D claim in the previous three years. These changes apply to claims in respect of accounting periods which begin on or after April 1, 2023 apart from the additional information form, which will be required for claims made on or after August 1, 2023.
Whilst the super deduction has been abolished, the introduction of full expensing was a welcome announcement in order to incentivise capital investment. On the other hand, the changes to the R&D SME scheme rates are less well received and will impact on many manufacturing and engineering businesses. It is likely that this could be a first step towards merging the SME and RDEC schemes.