Why UK companies should invest in new machinery and factory equipment now
After more than 12 months of unprecedented working conditions and extremely difficult challenges for power companies, the most sensible path for companies in the coming year seems, at first glance, to be to consolidate and let things work out while the economy stabilizes. However, the economic forecast for next year tells us that smart businesses will pick up the pace sooner rather than later. The greatest experts and economists are all saying the same thing; we will continue on the current trajectory until the last quarter of 2021 and the first quarter of 2022, when we will not only see things return to where they were pre-COVID, but we can expect continued growth from there .
Some consumers have really struggled during this pandemic, but others have clearly saved money and are looking for ways to spend it. Whether it’s vacations, new cars, a better lifestyle, or home renovations, whatever the excess cash comes out, there will be a welcome ripple effect on the economy. . How does this relate to investments in plant and machinery? We explore in more detail below how you can capitalize on the upcoming upturn in demand.
British government investment
The government wants UK manufacturers to be in the best position to take advantage of the expected increase in work, and business leaders have really pushed the Chancellor to facilitate this with a better capital gains deduction. It has been shown in the past how much of a difference such investments can make in ensuring that processing plants are in the right place to increase production, so the government has made it possible for manufacturers to invest. as part of their 2021 budget. The chosen strategy is the super tax deduction; a marked improvement over the traditional allowance for capital gains. The basis of the government plan is a provision for purchases that can be deducted from taxable income. The âsuperâ part of super deductions refers to the huge improvement in the current capital gains deduction.
Business groups have lauded the super deduction policy, saying it will encourage companies that can afford it to spend their money now, helping the UK recovery. Melissa Geiger, Head of Tax Policy at KPMG UK, said: âThe super deduction will be welcomed by businesses, especially those located outside of London in the manufacturing sector. In the short term, the Chancellor hopes the move will give businesses the confidence to invest money now rather than wait. “
Why you should include a plant and machinery capital deduction in your 2021 budget
The new super tax deduction is available to companies on expenses incurred between April 1, 2021 and the end of March 2023. So, why invest now? If the economy is about to improve and the demand for manufacturing is set to rise thereafter, we as an industry need to make sure that we are in the best position to meet that demand and reap the benefits. thanks to improved productivity, and therefore profitability. Add to that the fact that the capital deduction will improve cash flow for the following year, allowing you to invest more in any plant and equipment you may need as your business grows. . The benefits become greater if you can use the program from year to year as you reinvest more in your business.
What does the super deduction for machine and plant purchases really mean?
Plant and machinery, in this context, cover a whole range of tangible assets that could be used within a business. These are for example:
- Commercial transport such as vans and trucks
- Air compressor units
- Refrigeration units
- Computer equipment
The key to ensuring that you can take advantage of the super tax deduction is to make an outright purchase, as equipment rental is not included in the scheme.
What do the numbers look like?
The basis of the super tax deduction is that 130% of any capital equipment expense can be deducted from the corporation’s corporate tax bill through the capital gains deduction. Capital investments are already deductible from corporate profits before corporation tax is calculated. This means that if a machine costs Â£ 10,000 to buy, at the end of a typical business year the corporate tax rate (currently 19%) is payable on all profits less the value of the investment. , which gives you 19% x Â£ 10,000 = additional Â£ 1,900 on the bottom row. With the super tax deduction scheme in place, the amount that can be claimed is 19% of (Â£ 10,000 x 130%), which gives you back Â£ 2,470, an increase in this example of Â£ 570 on top of the l usual capital gains allowance. In real terms, any capital expenditure will result in a tax reduction of up to 25p per pound spent.
The old phrase âmake hay while the sun is shiningâ exists for good reason. Corporate tax is expected to drop from 19% to 25% from April 2023 with the end of the super tax deduction regime. Thus, companies that have not yet made capital investments will be in an even more difficult position at this time. Not only will the super-deduction scheme no longer be in place, and therefore any potential savings will have been missed, but the expense based on any profit made will also increase; a double whammy, making investments harder to justify and cash positions poorer.
Despite the difficult times some manufacturers have experienced during the pandemic, there is no better time to invest than today – and the more the plant and machinery capital deduction can be leveraged during this time. , the better. The recommendation? Start with the key elements at the heart of your business’ productivity and efficiency: servers for compute speed or key manufacturing equipment that needs to be upgraded or could be improved.
Think of this as the possibility of a super air compressor deduction, for example, to push your operational performance to the top of its game. Find out more about the equipment that could take your facility to the next level and better understand the potential gains from specific equipment, such as an air compressor, Glaston offers online tools such as energy calculators that can help you with the decision process. .
–Michael douglas is Managing Director of Glaston Compressor Services.