Are you prepared for the plastic packaging tax and other impending tax changes?

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On the 1st April 2022, the plastic packing tax is due to be introduced, this is one of a number of tax changes that could have a significant financial impact on food manufacturers in the upcoming months. It is designed to encourage more businesses to move away from single use plastics and instead invest in the use of recycled plastics or alternative packaging, but for food manufacturers that consume large volumes of plastic the tax could have unplanned cost implications.

The plastic packaging tax is not only the only tax change that is facing food manufacturing businesses. There are a number of upcoming changes in the next few months, including a 1.25%increase in Employer’s National Insurance Contributions (NICs) from April 2022 and a 6% increase in corporation tax from April 2023.

Companies should start to review and adapt their operations now, avoiding any reduction in profitability or unwanted cashflow gaps. Effective planning, including the use of three-way forecasting can give companies the ability to assess their exposure to the new taxes and put strategic plans in place to mitigate this.

How does the plastic packaging tax work?

Due to be implemented on 1st April 2022, the plastic packaging tax will apply at a rate of £200 per metric tonne for UK businesses that manufacture or import 10 tonnes of plastic packaging per year. The tax will apply to packaging that contains more plastic by weight than any other single material, and the definition includes compostable as well as biodegradable plastics. It is important to note that packaging that contains at least 30 per cent recycled plastic is exempt.

The sector is currently facing significant inflationary pressures affecting the price of goods, materials and most recently energy costs, along with growing demand for an increase in wages, the new tax represents another additional cost for businesses that fall above HMRC’s threshold.

How will it affect food manufacturers?

The introduction of the plastic packaging tax will also lead to an increased administrative burden for food manufacturers. Those that consume over 10 tonnes of plastic per year will need to register for the tax, even if they are not eventually liable to pay it. This includes importers of packaging that already contains goods, for example, plastic drinks bottles. Companies will also be required to provide declarations within customer invoices, confirming that the new tax has been paid. In order to do this, they may need to make changes to their accounting systems.

Scenario planning and three-way forecasting

Three-way forecasting, which involves combining data for a business’ profit and loss, balance sheet and cashflow projections, can help manufacturers to predict the financial impact that a number of different scenarios could have on their business model. For example, by inputting cost data based on a scenario that they fall above HMRC’s threshold for the plastic packaging tax, decision-makers can spot any potential cashflow gaps and take steps to mitigate them.

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There is also a possibility for some businesses to gain greater breathing space by freezing any short-term price increases for services and products or improve credit terms, through negotiating with suppliers. Alternatively, it may be necessary to pass additional costs onto customers by way of increased prices.

With the majority of food manufacturers set to pay more taxes this year, it’s important that businesses look at the bigger picture for their financial position. By planning ahead now, making use of three-way forecasting and exploring different ways to make their packaging more eco-friendly, they can mitigate any negative cashflow impacts associated with the plastic packaging tax, while becoming a more sustainable organisation.

For more information on the plastic packaging tax, get in touch with either Andrew or Anna

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Posted in Blog, Manufacturing