Tax increases the Government may be devising in order to recover expenditure from dealing with the pandemic must be cautiously measured. This would aid in preventing further problems for manufacturers as they continue to wrestle with tough market environments. Reports circulating have proposed that Chancellor Rishi Sunak may be preparing to increase the rate of Capital Gains Tax (CGT), to potentially as high as 45%. Manufacturing specialists at Menzies LLP believe, this could suppress entrepreneurial business strategies and make it tougher for SMEs in the manufacturing industry to invest in job creation and productivity advancements.
Andrew England, tax partner, said: “While some tax increases are expected, any decision to increase CGT above 38%, the current rate of tax that applies to share dividends, could have a devastating effect on manufacturing businesses. Entrepreneurs would no longer have any tax incentive to invest in building up the value of a business in order to realise gains at the point of sale. The flow of investment into entrepreneurial businesses could start to dry up as a result, undermining the sector’s fragile economic recovery.”
To circumvent more surprises for manufacturers, England suggests a precise strategy. He states:
“Manufacturers are facing major supply chain and logistics challenges at the moment, due to rising costs and ongoing skills and material shortages, and the pandemic is continuing to cause disruption across the world too. Further shocks for businesses must be avoided and any tax increases should be phased to minimise any collateral damage for the economy.”
In April 2022, Employer NICs is set to increase by 1.25%, along with a rise in Corporate Tax from the present rate of 19%, to 25% in April 2023. Evidently, the tax environment for businesses in this industry is becoming a lot more demanding.
Andrew England adds: “For SMEs in particular, as headline rates of Corporation Tax and Employer NICs start to increase, it becomes even more important to manage inflationary pressures on the cost base carefully, to remain viable.”
“The rise of remote working and globally-spread teams during the pandemic poses a challenge to the UK tax base, particularly as ideas and people are two of the cornerstones of the UK industrial strategy. To retain top manufacturing talent and ensure that UK industry remains competitive on a global scale, support for innovative manufacturing businesses needs to be high on the agenda. This should include incentives focused on the development of the UK knowledge economy.
“With COP26 on the horizon and to support the Government’s net zero by 2050 target, the Chancellor should introduce a range of green incentives and grants to encourage manufacturers to accelerate their journey towards sustainability and carbon neutrality.”
The Chancellor should also look at doing more to boost corporate investment in innovation by investigating ways to improve R&D tax relief. With an evaluation now underway, there is a possibility that the Chancellor may contemplate changing the individual schemes that apply to either SMEs and larger corporations, and replacing them with a universal rate, which encompasses all types of corporations and SMEs.
Andrew England said: “At a time when investment in innovation is a key focus for the Government as the economy rebounds, R&D tax relief has a major role to play in encouraging manufacturing businesses of all sizes to invest in technologies, which could give them a competitive edge. Merging the scheme could really help, potentially making it easier to access.”