Tax Guide for the Manufacturing Industry

At Ryans, we know that tax can be tricky and time consuming. That’s why we’ve put together this helpful tax guide to break down the complicated information and make the complex clear for those who run a business in the manufacturing industry, including guidance on R&D Tax Relief.

When you operate a manufacturing business, you will have to pay a number of different taxes including corporation tax, National Insurance (and other payroll taxes), VAT and business rates. 

Nearly all of these taxes must be paid to HMRC via a one-off Direct Debit payment, a bank transfer or by a debit card or corporate credit card (corporate credit and debit cards are charged a fee. There is no fee for personal debit cards.) Alternatively, you may also be able to file tax returns automatically if your business uses accounting software such as Quickbooks, Sage or Xero. It’s also worth noting that it is no longer possible to pay Corporation Tax via the Post Office. 

A key date to remember is the 6th April, which is the beginning of the tax year for most businesses. On this date, you can start to file your personal and corporate tax returns for the previous financial year, with the deadline of 31st January of the next calendar year, meaning the absolute latest you can file your taxes for the 2020-2021 financial year is 31 January 2022.

If you’re self-employed, this date is also the deadline for the first ‘payment on account’ for the previous financial year’s taxes. Payments on account are tax payments made twice a year to spread the cost of the year’s tax. The second payment is due on the 31 of July of that same year and the final payment is due on 31 January the following calendar year.

Corporation Tax for the Manufacturing Industry

Corporation Tax is a tax that all limited UK businesses must pay on its profits. Your business’ profit is any money left over after you’ve deducted your expenses (we’ll discuss this more late on). Only limited companies pay corporation tax, meaning sole traders are exempt. The main corporation tax rate is 19% and is levied on all profits and chargeable gains (profits made when selling off company assets). 

There are two parts to corporation tax filing: 

• Company accounts
• Company tax returns

Calculating Your Annual Company Accounts

Each year you must file an account with Companies House that includes important information that follows strict guidelines such as a balance sheet, a profit and loss account and a signed directors’ report. It’s important to make sure that each document adheres to the guidelines.

Balance Sheet

The balance sheet presents an overall picture of your business at the end of the financial year (usually the 5th April unless you have chosen a different end of year date) and includes cash, any debt you owe and are owed, investors’ money and assets such as property and equipment. You should take into account the depreciation of your assets (the loss of value over time).

A quick and simple way to calculate the depreciation of your asset is by taking the asset’s purchase value, subtracting the salvage value (how much it will sell for when it’s no longer useful) and dividing it by the number of years you think it will be useful.

Most accountants can calculate depreciation for you and there are a range of other methods that can be used to work out depreciation, however, this method is the easiest for smaller businesses.

Profit and Loss Account

The profit and loss account looks at your year’s activities, including your sales, other sources of income (e.g. investments) and how much money you’ve spent on running costs (including payroll and payroll taxes). It’s important to ensure these figures are accurate as your profits and loss account determines the amount of tax you pay.

To calculate your gross profits, use our handy online gross profit calculator.

The account doesn’t include any debts you owe or are owed or costs incurred from buying fixed assets. If your company is registered for VAT, any figures on your profits and loss account must exclude VAT as this goes on your VAT return. If your company isn’t registered for VAT, then all figures should include it.

For businesses with a high number of sales each day, you can make accounting easier by exporting them to a spreadsheet and importing them into accounting software such as Quickbooks, Sage and Xero. 

Directors’ Report

The Directors’ Report is a document that is required by law and must be signed by the company director(s). It must include the following:

• The names of the company partners
• A brief description of the business
• A declaration that the accounts comply with all UK laws

Companies registered as a ‘micro-entity’ aren’t required to submit a directors’ report. Micro-entities are companies with fewer than 10 employees, a turnover of up to £632,000 and less than £316,000 on the balance sheet. 

Filing Your Tax Return

Once you’ve calculated your profit and loss account, you can start to fill in your tax return which asks you to provide certain information including:

• Turnover from trade made this tax year
• Profits made or losses incurred this tax year 
• Any losses brought forward from the past

With these numbers, you can calculate your net trading profit.

You must also include information about loans, money owed by creditors, money you owe, money made through other means e.g. bank interest, gains on investments and sales of assets. It’s also important to make deductions where possible including management expenses, capital allowances, charity donations (made in the business name) and gains from selling property.

There are other deductions you can make that you’re likely to encounter whilst managing your business (listed on HMRC’s website). 

Once you’ve filled in these figures, either your accountancy software or the HMRC’s online form can calculate the tax you owe and any reliefs or credits you are eligible for. You’re also able to claim back overpaid taxes.

If you’ve made a sale on any business property, equipment or other assets, you may have to pay Capital Gains Tax, meaning if you bought your property for £175,000 and sell it for £257,000, you’ll have to pay 28% tax on the £100,000 profit which is £28,000.

Tax as a Sole Trader or Partnership

If you are a sole trader, or if you’re in a partnership where you have personal liability for your business then you’re exempt from paying corporation tax and don’t need to file accounts at Companies’ House. As there is no legal separation between yourself and your business, the money your business makes is classed as personal income, which you’ll have to pay income tax for instead.

Corporation tax is paid at a flat rate whereas income tax is progressive, which means that the percentage you pay increases depending on the amount you make. As of 2020-2021, the income tax bands are as follows:

Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,500	0%
Basic Rate	£12,501 – £50,000	20%
Higher Rate	£50,001 – £150,000	40%
Additional Rate	£150,001+	45%

Although the tax return you submit as a sole trader/partnership is simpler than the corporation tax document, you are still required to calculate your turnover, profits and expenses in a similar method.

Claiming Research and Development (R&D) Tax Relief

Research and Development (R&D) Relief is an incentive designed to support and encourage innovative businesses and boost spending with R&D companies. A range of different companies can claim the relief, even on projects which are unsuccessful so long as the work is part of a specific project to make an advance in science or technology.

It’s important to note that the relief cannot be claimed on projects that make an advance in social science such as economics or in a theoretical field such as pure maths.

Depending on the size of your company and whether or not the project was subcontracted to you, there are different types of R&D relief:

Small and Medium Enterprises (SME) R&D Relief

SME R&D relief allows companies to deduct an extra 130% of their qualifying costs from their yearly profit on top of their usual 100% deduction, bringing it to a total of 230%. It also allows them to claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.

You’re able to claim SME R&D relief if you’re a SME with:

• Less than 500 employees
• A turnover less than €100 million or a balance sheet with a total below €86 million

You might need to include any linked companies or partnerships when working out if you’re an SME.

Research and Development Expenditure Credit

Large companies can claim a research and development expenditure credit (RDEC) when working on R&D projects as well as SMEs who have been subcontracted to do work for a large company.

The RDEC is a tax credit calculated at 13% of your company’s qualifying R&D expenditure and is taxable. The credit may be used to discharge the liability or result in a cash payment depending on whether your company is profit or loss making

Costs You Can Claim with RDEC

Staff Costs

For staff working directly on the R&D project, you can claim a percentage of their:

• Salaries
• Wages
• Class 1 National Insurance contributions
• Pension fund contributions

You can also claim for any administrative or support staff who directly support a project e.g. specialist cleaning staff. You can’t claim for clerical or maintenance work that would have been done for regular projects such as managing payroll. You can also claim 65% of the relevant payments made to external agencies that provide staff for the project.

Subcontractor Costs

Subcontractor expenditure can’t be claimed unless it’s directly undertaken by:

• A charity
• A higher education institute
• A scientific research organisation
• A health service body
• An individual or partnership of individuals

Consumable items

You can claim for all consumable items used up in the R&D project including:

• Materials
• Utilities

Costs You Can’t Claim For with RDEC

You can’t claim for:

• The production and distribution of goods and services
• Capital expenditure
• Cost of land
• Cost of patents and trademarks
• Rent or rates

How to Qualify for R&D and RDEC

In order to qualify for R&D relief, you must be able to explain how your project:

• Looked for an advance in science and technology
• Had to overcome uncertainty
• Attempted to overcome this certainty
• Couldn’t be easily worked out by a professional in the field.

You may also research or develop a new process, product or service or work to improve an existing one. Any advances you make must be within the overall field and shouldn’t just be for your business e.g. using a pre-existing technology for the first time in your sector.

In order to prove that a professional in the field could not have worked out your advance, you can do a number of things such as showing past failed attempts or by showing that your project team are professionals in the field and having them explain the uncertainties involved.

To show that there was uncertainty involved, you must prove that your company or experts in the field cannot already know about the advance you made or the way you achieved it. This is because scientific or technological uncertainty only exists when an expert on the subject is unable to say if something is technically possible or how it can be done if it is.

You must be able to show that you needed to do research in order to overcome the uncertainty. This could be a simple description of your successes and failures throughout the project.

How to Calculate RDEC

To work out your expenditure you should:

1. Calculate the costs that were directly attributable to R&D.
2. Lower any relevant subcontractor or external staff provider payments to 65% of the initial cost.
3. Add all costs together.
4. Multiply the figure by 13% (0.13) to get the expenditure credit.
5. Enter this figure into your tax return.

How to Claim RDEC

You can claim the RDEC credit by entering your expenditure into the full Company Tax Return form (CT600). If your claim covers a period of 12 months or more, you’ll need to submit a separate claim for each accounting period.

Get Professional Assistance with Your Corporation Tax

Corporation tax represents a substantial part of your trading costs and ensuring you are compliant with the law can hold a heavy burden, especially as reporting obligations increase, investigation policies from the tax authorities become more strict and penalties for non-compliance become harsher.

Efficient corporate tax planning can potentially result in large increases to your bottom line. Maximising your net profits whilst ensuring you’re complying with the law is a win-win.

Calculating your taxes and submitting your tax returns can take a great amount of time and resources, which is why we offer a range of services to help you minimise your corporate tax exposure and relieve you of the administrative burden of complying with tax legislation. These services include:

• Determining the most tax effective structure for your business
• Taking full advantage of tax opportunities and reliefs
• Achieving the optimum capital or revenue tax treatment
• Reducing tax on disposals and maximising relief on acquisitions
• Making good use of tax opportunities specific to your industry
• Meeting the strict demands of compliance including corporation tax self assessment
• Acting on your behalf in discussions with the tax authorities

National Insurance and Payroll Taxes 

Whether you’re a sole trader or limited company, every business must contribute to their Employers’ National Insurance contributions as well as their employees’ portion of National Insurance payments, income tax and student loan payments. This is all part of running payroll and is referred to as payroll taxes.

You must pay Employers’ National Insurance for employees who you pay over £157 a week. You must also count yourself as an employee, though if you pay yourself through dividends as opposed to, or as well as, payroll you’ll need to pay dividend tax. As of 2020-2021, the dividend tax bands are as follows:

Tax Band	Tax Rate
Dividend Allowance (£2,000)	0%
Basic Rate	7.5%
High Rate	32.5%
Additional Rate	38.1%

To calculate your dividend tax, use our handy online dividend tax calculator.

When running payroll, it’s incredibly important to have a diligent system in place. Whilst HMRC offers a basic system, it is limited in its abilities and can’t generate a payslip in the way advanced accounting software such as Quickbook, Sage and Xero can.

Once you’ve got an effective system in place, you’ll need to run payroll every month and provide your employees with payslips that detail their gross pay, PAYE deductions and their net pay. Student loan payments and pension contributions are deducted from employee payslips.

It’s a requirement of HMRC that you submit Full Payment Submission by 22nd of the month once payroll has run, which is a report containing information on the total amount you are paying your employees as well as the deductions. You must also pay the full balance for your PAYE taxes by this same date.

To calculate your payslips, use our handy online payslip calculator.

Get Professional Assistance with Your National Insurance and Payroll Taxes 

Administering your payroll can be time consuming and inconvenient, forcing you to redirect energy and resources from your business’ core activities. The task is made all the more tricky by the growing complexity of taxation and employment legislation as well as the accompanying regime of penalties for non-compliance.

HMRC claim that over 80% of data quality problems are caused by holding incorrect information about an employee’s name, date of birth or National Insurance number.

Under PAYE Real Time Information (RTI), the information that you submit to HMRC every time you pay your employees is matched against records HMRC stores on their National Insurance and PAYE Service (NPS).

Failing to run your payroll effectively can also lead to unhappy employees and no employer wants that added worry. If the records you submit don’t match, you may create duplicate or inaccurate records which could result in incorrect tax calculations or HMRC compliance checks.

Luckily, we have a dedicated team of trained staff at Ryans who can relieve you of this burden by providing a comprehensive and confidential payroll service, including:

• Customised payslips
• Administration of PAYE, national insurance, statutory sick pay, statutory maternity pay, etc
• Completion of statutory forms, including year end tax returns, to issue to your employees and submit to HMRC
• Summaries and analyses of staff costs
• Administration of incentive schemes, bonuses, and ex-gratia and termination payments
• Administration of pension schemes

Even if you have only a few employees, you will make savings by hiring us to administer your payroll. We can help you to make sure the information you hold about your employees is correct, so you can avoid any unnecessary stresses.

VAT

If your manufacturing company has a monthly turnover of £83,000+ in the last tax year, you must register for VAT, though you can also do this voluntarily if you earn less than £83,000. If you’re VAT-registered with HMRC, you have to document and add VAT to every transaction you make. You can also claim back VAT on business purchases.

There are 3 rates of VAT:

• 0% (zero-rated services e.g. most food and children’s clothing)
• The reduced rate of 5% (some goods and services e.g. children’s car seats an energy for your home)
• The standard rate of 20% (most goods and services)

As your business is within the manufacturing industry, you are most likely going to be providing both all three services depending on what it is you manufacture. 

When generating invoices you must show your VAT number and information and show the ‘time of supply’ which is the date the transaction took place for when it comes to doing your taxes. You are able to reclaim VAT that you have paid for almost all business purchases and employee travel expenses so long as they are registered on your VAT return.

This return is submitted via HMRC’s Government Gateway and must include all invoices and receipts that you generate in that quarter and any import/export documents. 

The most effective way to keep track is by using a dedicated VAT account. This account notes details of any applicable purchases or sales. Keeping this account up-to-date and allows you to calculate the VAT you owe HMRC and any VAT you can claim back.

Keeping your accounts in order is crucial should HMRC ever request to conduct an inspection. You must keep VAT records for at least 6 years (or 10 if you use the VAT MOSS service). They can be kept on paper, electronically or as part of a software such as Quickbooks, Sage and Xero.

To calculate your VAT tax, use our handy online VAT calculator.

Get Professional Help with Your VAT

The constant specific changes being made to VAT regulations and the ever growing demands of HMRC call for a trained professional eye to ensure that you do not fall foul of the regulations and end up paying the Exchequer more than you need to!

At Ryans, we provide an efficient cost effective VAT service, which includes:

• Assistance with VAT registration
• Advice on VAT planning and administration
• Use of the most appropriate scheme
• VAT control and reconciliation
• Help with completing VAT returns
• Planning to minimise future problems with HMRC
• Negotiating with HMRC in disputes and representing you at VAT tribunals

Business Rates

If your business operates in offices, factories etc then you’ll likely have to pay business rates. Business rates are charged on most non-domestic properties such as:

• Shops
• Offices
• Pubs
• Warehouses
• Factories
• Holiday rental homes/guest houses

Around February and March each year, your local council will send you a business rates bill for the following tax year.

If you run your business from home, you are usually exempt from paying business rates as well as council tax, however, there are some exceptions including:

• If you employ staff who also work in your home
• If you sell goods or services from your home to customers that visit
• If you have transformed your home into a workspace e.g. converting your shed or garage into a beauty salon
• If your property is part business part domestic e.g. running a pub and living above it

Other premises such as farm buildings are automatically exempt from business rates.

Business Rates Relief Schemes

If you are struggling to pay your business rates, you may be able to get relief from your local council by applying for a reduced bill or grant. You may be eligible for the following relief:

• Small businesses rate relief
• Rural rate relief
• Enterprise zone relief
• Hardship relief
• Retail discount

You can apply for small business rate relief if your property has a rateable value under £15,000. With this relief, you won’t pay business rates on property with a rateable value of £12,000 or less and the relief on properties between £12,000-£15,000 will decrease gradually from 100% to 0%.

The rural rate relief is eligible to businesses operating in rural areas with populations of less than 3,000 people. You can get 100% relief if your business is also either the only village shop/post office with a rateable value of up to £8,500 or if it is the oblh public house or petrol station with a rateable value of up to £12,500.

If you’re experiencing financial difficulties, you could qualify for hardship relief. In order to qualify, you must satisfy your council that you would be in financial hardship without the relief and that the relief would be in the interest of local people.

Experts in the Manufacturing Sector

Companies operating in such a business environment need experienced, professional advisers to help them steer a steady course. At Ryans, we have years of experience acting for clients in the manufacturing sector, allowing us to provide services including:

• Managing your accounting, tax and audit requirements
• Minimising risks from pricing and supply fluctuations
• Optimising your stock control
• Making important investment decisions
• Arranging acquisitions, mergers, or disposals
• Raising finance
• Managing cash flow through interest rate exchange and rate fluctuations
• Handling foreign currency transactions

To save yourself a job and potentially a lot of money, why not have a chat with us to discuss our corporate tax planning service? Get in touch today by calling us on 01204 523263 or by leaving us a message.

Although we have tried to make this guide as comprehensive as possible, it is not a substitute for exhaustive professional help and advice. For more tips, information and tax guides, check out our helpful blog and resources.