Tax on profits is possibly one of the most frustrating and unproductive business costs because management has limited say over the amount and no control over how the money is spent.
Fortunately, however, there are tax breaks available to encourage business investment and ease the burden. These are intended by Government to be claimed and are seen as legitimate by HM Revenue. So, they are a great way to minimise tax bills in a low-risk way.
There are a couple of key tax reliefs available to businesses in the industrial and logistics sector – capital allowances and research & development relief.
Plant and machinery allowances
Plant and machinery capital allowances are designed to encourage investment in business equipment and facilities. They have been around for years and are generally well used for equipment such as machinery, storage racking, vehicles or computers. However, they can also be claimed for many commonplace and expensive fixtures on business premises, which have their own capital allowances rules. Typical qualifying assets include electrical power and lighting, hot and cold water, heating and mechanical ventilation, alarms and many fittings and furnishings. Until the end of 2020, up to £1 million can be expensed for tax immediately in the year the money is spent. Every £100,000 spent on qualifying assets can save £19,000 of tax on profits at the current 19% corporation tax rate.
Structures and buildings allowances
There has also been a major change to the capital allowances regime recently. It used to be the case, since the second world war, that industrial and logistics businesses could claim capital allowances for money spent on structures and buildings under the former system of ‘industrial buildings allowances’ (IBAs). However, IBAs were abolished from 2011, and since then capital allowances were normally only available for plant and machinery.
However, that changed for construction works under contracts entered into from the end of October 2018 because the Government created a new type of capital allowances called ‘structures and buildings allowances’ (SBAs). Initially, this gave 2% tax relief a year flat-rate on previously non-qualifying buildings and structures including roads, hard surfaces and so on. But in a welcome move in the March 2020 Budget, the Chancellor boosted the rate by a half to 3% over 33⅓ years.
Research and development relief
Research and development (R&D) relief is a generous tax relief for companies that carry out R&D. On the face of it, this perhaps does not sound very relevant for the industrial and logistics sector, but many companies are surprised that the definition of R&D, for this purpose, is much wider than the traditional view that R&D is just done by technicians and scientists in white lab coats.
For tax purposes, R&D occurs when a project seeks to achieve an advance in science or technology, which can potentially be in any industry. Technology is the practical application of scientific principles and knowledge. And the activities that contribute to achieving that advance, through the resolution of uncertainty, are R&D. In other words, something a company is doing, or paying someone to do, to solve a ‘head scratching’ technological problem that a competent professional in that field would not be able to do easily without carrying out a systematic project to work it out. In a logistics and supply chain management context this can include many works involving technological uncertainty and advances for the business, such as process automation and improvements, or developing software to track freight or deal with information.
R&D relief is available for revenue expenses incurred on R&D work, including staff costs, agency workers, subcontractors, software licences and water, fuel and power. The tax deduction is 230% of the money spent. Or put another way, every £10,000 spent on qualifying R&D generates an additional tax deduction of £13,000 (because the actual £1,000 cost can already be written-off for tax in full as a business outgoing). This saves an extra £2,470 of tax at the current 19% corporation tax rate.
Claiming capital allowances and R&D relief helps ensure the right amount of tax is paid on business profits in a reduced risk way. But like many areas of tax the rules can be complex to prevent abuse, so it is important to take care.