scruttonbland.co.uk MANUFACTURING & ENGINEERING
AI And Automation In Manufacturing
R & D Tax Regime Changes
VAT Reclaim Opportunities
Contents 3 Welcome To The First Edition Of Our Manufacturing & Engineering Newsletter
10 VAT In Manufacturing
12 Overseas Ownership –
What You Need To Know
4 AI And Automation In Manufacturing
14 Changes To FRS102: Operating Leases
6 Change Of R & D Regime From 1 April 2024
16 Meet The Team
8 Are UK Manufacturing M&A Trends About To Turnaround?
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Welcome To The First Edition Of Our Manufacturing & Engineering Newsletter
Manufacturing & Engineering is a cornerstone of the UK economy, a sector that not only underpins our nation’s economic growth but also drives innovation, supports millions of jobs, and plays a pivotal role in shaping our global trade relationships. With nearly half of all UK exports originating from manufacturing, according to Make UK, the sector’s contribution is both significant and indispensable.
T his is why I am thrilled to and opportunities within the sector. Our goal is to provide you with insightful and practical content that not only highlights topical issues, but also offers actionable guidance to help you navigate the complexities of the industry. In this edition, we bring together a range of articles that delve into the most pressing issues and emerging trends within the manufacturing and engineering sector. present the first edition of our Manufacturing & Engineering newsletter, dedicated to exploring the key developments, challenges, On page 4, Ryan Pearcy, SB Digital Associate Partner, explores the transformative impact of AI and automation on manufacturing. As technology continues to evolve, understanding how to effectively integrate these tools is crucial for staying competitive in the global market.
On page 8, Luke Morris, Corporate Finance Partner, shares the latest trends shaping the manufacturing sector. His insights offer a valuable perspective on the forces driving the industry and the opportunities that businesses should be aware of. Paula Mason, VAT Manager, addresses the latest VAT updates affecting the manufacturing sector on page 10, with an appropriate mention of the place of supply of services rules. As VAT regulations continue to evolve, her guidance will help businesses navigate these changes and ensure compliance. For those that have or are considering overseas investment into the business, our feature on page 12 draws attention to some of the key areas of legislation you need to know. Whether you are looking to expand globally or attract foreign capital, understanding the nuances of overseas investment is crucial for making informed decisions. Finally, on page 14, John Perry, Audit Partner, discusses the upcoming changes to leasing rules set to take effect from financial periods beginning on or after 1 January 2026. With early adoption permitted, his article provides key insights on how to ensure your accounting practices are aligned with the new standards.
The UK is one of the world’s largest exporters of manufactured goods, and our region is home to many amazing businesses within the sector, some of which were on show recently at the NAAME’s East of England Manufacturing Conference held at West Suffolk College. Offering a wide range of jobs and supporting a supply chain across numerous sectors, manufacturing and engineering really is a sector that we are passionate about. Accordingly we hope you find this newsletter both informative and engaging, and we encourage you to reach out to a member of the team if you would like to explore any of these topics in more detail.
Steven Burgess Audit Partner
Chris George, our Tax Advisory Partner, provides an in-depth look at the recent
changes to the R&D regime on page 6. With innovation being at the heart of manufacturing, staying informed about these changes is vital for businesses looking to leverage R&D tax incentives.
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AI And Automation In Manufacturing Manufacturing is an area ripe for automation. Machines and software have been automating manufacturing processes for centuries and it is no different as software providers move development into the realm of cloud technology and Artificial Intelligence (AI). Ryan Pearcy, SB Digital Associate Partner shares his expertise by identifying trends in manufacturing automation and how AI is penetrating this space.
The importance of Automation Automation in manufacturing is the use of software and machines to perform specific tasks without the need for human intervention. Traditionally this would be frequent, repetitive or dangerous tasks but has moved into the realms of predictive and subjective areas, allowing humans to review, rather than do. All of this is to increase efficiency, quality, safety and provide greater insights for decision making. The squeeze on labour markets following covid and politically triggered supply chain disruptions has driven up the need for automation with the International Federation of Robotics noting a 30% year on year growth rate in the use of machines, be that physical or virtual, to streamline processes. The demand is there, but what can be delivered.
Types of Machine Automation There are multiple ways to automate
Software Automation As well as the use of software for machines, cloud technology has advanced the development of back-office functions to streamline manufacturing processes further. This can range from a connected finance system to automate processing of transactions, to inventory management, delivery and forecasting. Interconnected finance systems have been the norm for larger enterprises through the use of ERPs. These systems connect various elements of the business operations together into a single system where data can be shared but are expensive and therefore prohibitive for smaller businesses who have had to resort to manually transferring information from one place to another. The advent of cloud systems with secure API connections enables the creation of a “Modern ERP” which is tailored to the specific needs of the business but at a price point that is manageable. This plug and play style also enable businesses to grow and evolve without the pain of completely changing how a business operates. Data can be collected and shared through the systems removing manual data entry and enabling team members to be approvers and reviewers rather than processors.
manufacturing processes, each using a different blend of software and hardware. Examples of these include: Computer-Integrated Manufacturing (CIM) – CIM is where the process is automated by machines. Robotic production lines are an example of this where prototypes, build, quality control, storage, data and distribution are automated. Industrial Internet of Things (IIoT) – Devices connect sensors to triggers and use AI to automate actions and decision making based on pre-set parameters. These are effective feedback loops to improve precision and quality, but can also be used to trigger the start and stop of processes. Hard Automation – This would be considered simpler automation where machines are programmed for a particular task. F lexible Automation – This builds on hard automation but allows for refinements to systems and processes via computer controls but with human intervention.
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As systems develop it is critical that business owners are aware of the possibilities and options available to them. We always advise speaking to an expert to ensure you select the right system for your needs, get this implemented correctly and have someone to reach out to for support if things change. The SB Digital team can assist so please reach out to Ryan if you have any queries by calling
Forecasting and demand planning is where AI comes into its element. By using big data and predictive analysis, software uses historic trends, customer buying patterns, seasonality impacts, marketing plans and economic conditions to predict sales forecasts. Working backwards and considering resource availability also enables manufacturing forecasts to be automated. What was once the realm of Mystic Meg has become a science with increasing accuracy. Heavily used by the likes of Amazon these tools are starting to appear in smaller business systems and enable those that invest in technology to get insights that can drive business success. Advances in inventory management enable automated procurement processing based on minimum stock levels. Combine this with predictive sales and production forecasting as discussed above and businesses can ensure they have lean inventory levels, reducing their exposure and the impact on cashflow.
Automated delivery tracking updates the system for where goods are located and reduces the need to chase suppliers and logistics partners and update customers as well as prompting communication where necessary. This can also update inventory levels automatically as status change through the process, which links into the automation on inventory management. What’s next? Automation continues to be built into manufacturing products, focussed around connected systems and triggers. Generative AI, such as ChatGPT, is still being built into software products and we would expect that to be the next big phase of automation development, changing how teams interact with the various systems they use. As Chris George points out in his article on page 6, regarding Research & Development tax relief, in some cases claims for additional tax relief can be applicable to companies who develop their own bespoke software. However, utilising existing ‘off the shelf’ software and integrating it into your company’s operations is unlikely to breach the threshold to qualify as development.
0330 058 6559 or by emailing hello@scruttonbland.co.uk
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Change Of R & D Tax Regime From 1 April 2024
For many manufacturing businesses, development and innovation is at the very heart of what they do. From coming up with unique products to integrating new technology into the manufacturing process, companies who manufacture are at the forefront of research and development. M any businesses in the sector make use of Research and Development (R&D) Tax Relief to help recoup some of the significant outlay involved in this innovation. The R&D tax regime has been under HMRC’s microscope in recent years and from 1 April 2024, there are further significant changes. Following on shortly from the changes announced in the last two years, these changes dramatically reduce the amount of R&D tax relief available to many owner managed businesses. Chris George, Tax Partner, explains what the key changes are: qualifying expenses. If, for example, a company spent £100,000 on R&D qualifying costs, they received an additional deduction of £86,000, reducing their Corporation Tax liability. The Corporation Tax saving equates to £86,000 at the Corporation Tax rate of 25%, meaning an effective tax saving of 21.5% on the £100,000 of qualifying expenditure. And as well as this one simple set of rules, there will be another set of rules for companies which meet the definition of R&D intensive. The SME scheme previously available to the vast majority of claimants was relatively simple. It worked by providing an uplift on R&D
If the R&D claim created or enhanced a loss, this could be surrendered for a repayable tax credit. The RDEC scheme however takes a little bit more effort to get your head around. Instead of an enhanced expense, companies have an ‘above the line’ taxable credit. This amounts to 20% of the qualifying expenditure. So, taking forward the example above, this is the £20,000 income amount shown in the table. The Corporation Tax liability is then calculated on this profit before the RDEC credit is then deducted. For a company paying at the full 25% rate, the effective tax saving is 15%. This is a significant reduction from the 21.5% that the company could claim in the previous year.
Key Changes For accounting periods starting on or after 1 April 2024, the two current R&D schemes are being merged into one scheme, based on the previous large company Research and Development Expenditure Credit (RDEC) scheme. The aim of this merger is to make claiming R&D tax relief simple, easy for businesses to understand with one set of rules. However, the main problem with this, is that one set of rules is based on the large company RDEC scheme, which 87% of companies have never used before!
Year Ended 31 March 2023
£
Year Ended 31 March 2024
£
Profit
500,000
Profit
500,000
R&D expenditure
(100,000)
R&D expenditure
(100,000)
R&D uplift
(86,000)
RDEC credit
20,000
Taxable profit
314,000
Taxable profit
420,000
Corporation Tax
78,500
Corporation Tax
105,000
R&D Extra Tax Saving
21,500
Deduct RDEC
(20,000)
Net Corporation Tax payable
85,000
R&D Extra Tax Saving
15,000
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Administration Changes From August 2023, all claims for R&D tax relief have required to be filed alongside an Additional Information Form. This form provides HMRC with information regarding the costs being claimed as well as the R&D activities being undertaken. Additionally, companies which have not made a claim for R&D tax relief in the previous 3 years must submit an advanced notification form to HMRC. This notification must be submitted within 6 months of the end of the company’s accounting period. Why have HMRC made these changes? The R&D tax relief schemes have previously been very generous. Given that this scheme enables some companies to claim a cash refund from HMRC, it has been targeted for fraudulent purposes. In the past only a very small number of R&D claims were checked by HMRC enabling this fraud to expand. However, over the past 2 years, HMRC have put additional resources into their checking of R&D claims. Some estimates say that as many as one in five R&D claims are now being reviewed.
Given the significance of the changes announced and their potential impact on small early-stage companies, a concession has been announced for ‘R&D Intensive Companies’. Broadly these are companies who spend at least 30% of their total expenditure on R&D qualifying costs. These companies will still be able to benefit from the SME scheme rates of R&D relief and be able to surrender tax relief for a repayable tax credit. One further change is the limiting of tax relief to activities and costs incurred on R&D work which is undertaken within the UK. Previously as long as the claimant company was subject to UK Corporation Tax, R&D tax relief could be claimed on qualifying expenditure regardless of where it was carried out. However, for accounting periods starting on or after 1 April 2024, relief is now restricted to R&D undertaken within the UK. This has the potential to impact on a large number of UK businesses so careful planning should be considered for those businesses which are affected.
Therefore, by simplifying the scheme and requiring additional technical information, it enables HMRC to focus their efforts on the claims that require their attention whilst at the same time making fraudulent claims less attractive. How to make a Qualifying Claim for R & D In order to make a compliant qualifying claim for R & D, directors need to acquaint themselves with the R & D criteria relating to their company, or to work with a trustworthy agent who will be able to guide them through the process, and importantly be there for support should HMRC select the claim for detailed scrutiny. At Scrutton Bland, we have a dedicated team who will be pleased to work with you to identify projects eligible for R & D, and to guide you through the process of making a claim. If you would like to discuss an of the changes mentioned in this article, please reach out by emailing hello@scruttonbland.co.uk or calling on 0330 058 6559.
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Are UK Manufacturing M&A Trends About To Turnaround? The overall data is pretty gloomy. It tells us that the UK manufacturing “deal scene” has seen a decrease in transaction volumes over the past year.
But Luke Morris, Corporate Finance Partner explores if there are now signs of a bit of a turnaround?
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I say decrease in volumes overall because, our clients saw significant interest from overseas investors and we were able to help them complete on several large, and rather complex, cross-border transactions. Foreign interest in UK manufacturing businesses has remained strong, it’s even grown I would suggest, despite the overall picture. So why, now, signs of a turnaround overall? Well, for one, private equity seems to have woken up from a slumber period, and whilst it has retained interestingly, deals in the sector which we ourselves handled held up well last year. However, I must confess that there was a stark reason for this: our particular focus meant that a focus on strategic investments in sectors like technology and healthcare there are indications of more creative funds now looking outside of the norm. Particularly in the types of deal they will consider at and the way in which they can be financed. One fund I was speaking with recently is focused on sustainability and eco-friendly acquisitions, because that is what their Limited Partners want. They are pushing for consolidation of advanced manufacturers fitting this bill in order to improve processes, encourage new ideas, drive economies with technology, and deal with skill shortages and succession issues. All sensible stuff so far. But where they differ is in that they are what I would call a “1980s Stanford Business School Search Fund”: they want to buy an existing, typically stable (but not necessarily growing), business to run and scale.
Furthermore, on financing specifically, innovative deal structures are not just becoming more common for buyers: we have seen sellers becoming increasingly comfortable with flexible arrangements using tools such as earn-outs, warranty insurance and other exotic arrangements to bridge buyer-seller expectations and manage exits. I don’t know entirely what to put this down to. Experiences over the last decade and a demographic shift in business owners, perhaps? Valuations have certainly weakened and made the current market conditions a buying opportunity for investors. Perhaps sellers are coming to terms with that? Secondly, add to the mix the new labour government, which will define the macroeconomic tone for UK plc for the next 5 years. The proof of the pudding is in the eating, but the noises they made during the election campaign ought to favour the sector: talk of industrial policy, talk of new infrastructure and house building, talk of energy efficiency and green jobs. We also must assume that the Prime Minister is well disposed to the sector: he certainly did not tire of reminding us that his father was a Tool Maker during the debates. The Bigger Picture I am not persuaded by the consensus view on inflation outlook. I understand (but am not persuaded by) the reasons given for the spike we saw: war, supply chain issues, skills shortages, strong demand, spiralling energy prices… However, in my view it is government spending that did the damage, and that shows no meaningful sign of abating longer term. Au contraire. We may well anticipate rates coming down per the Bank of England, but those of you sad enough (like me) to actually read actuarial reports will see a different longer-term picture being painted.
The term, “scale up” seems to have reappeared in the lexicon.
Such funds understand that the lower mid-market is not, and never will be, “Perfect Manufacturer Limited”, but it could become more so (with work). They understand that this work will ultimately drive them value. Watch this trend as I expect more of it: clever entrepreneurs with institutional-backing becoming first-time hands-on CEOs by acquiring established businesses, offering a quicker and less risky path to business ownership for them, as well as a return to their investors who need to deploy funds and grow somehow. It’s not all about cash earnings, hockey-stick growth and light balance sheets. Plus, acquiring 100% is not the only obvious choice for Search Funds.
Continued Government stimulus, as well as geopolitical tensions and shocks (including,
potentially, a protectionist second Trump term), may further accelerate re-shoring to the UK and add to inflationary pressure. So, what are the smart people doing? Well, the data tells us that the big companies, the trade acquirers, know that if they have a proven track record of successfully generating value through deal activity then they will find future deals easier to finance in unstable conditions and happy shareholders. Those that don’t, will not. So, the (smart) big companies are also keen on deals and I sense this is contagious. The UK Manufacturing deal scene is a complex story, but the investors’ interest in the sector’s strategic growth remains strong and the macroeconomic weather for the sector could now be brightening up. As ever, proper planning is key and getting professional advice on board as soon as possible is the way to maximise your deal’s value. To reach out to Luke or a member of the Scrutton Bland team, email hello@scruttonbland.co.uk or call 0330 058 6559.
Contrast this approach with the archetypal sluggish and leaden “investor-only” funds.
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VAT In Manufacturing VAT can be a complex area and there have been a plethora of diverse cases we have seen been debated in the manufacturing sector. Paula Mason, VAT Manager, highlights some of these in her update below.
EU VAT Reclaim Opportunities Manufacturers typically suffer VAT in connection with their business activities both in the UK and in EU Member States. Obviously, VAT suffered in the UK can be reclaimed in the UK VAT return, but how can VAT suffered in the EU be reclaimed when the business is only required to be registered for VAT in the UK? The answer lies in the EU Thirteenth Directive. This allows businesses to recover EU VAT suffered on expenses such as accommodation, food and drink, marketing, transportation, and various other expenses relating to the manufacturing process where the place of supply for VAT purposes is where the supplier is located. Claims must be made directly to the tax authority for each Member State, and each have their own eligibility rules, as well as differences in dates to submit claims by and minimum amounts. Therefore, it can be quite a complex area for manufacturers submitting multiple Member State claims and professional assistance is usually a must. However, submitting claims is definitely worth considering if the VAT being suffered in the various Member States is significant.
Background to the Case The product in this case was a two-in-one solution marketed to sports enthusiasts and consisted of a flapjack and either a cake or a brownie which was packaged together. The flapjack provided carbohydrates for energy prior to exercising and the cake or brownie provided protein after exercise to rebuild muscle. The taxpayer heavily researched the VAT treatment of the products and was confident that they should be treated as cakes and therefore zero rated but, to gain certainty, they wrote to HMRC in October 2021 asking for clearance. HMRC disagreed, stating that the products were confectionery and therefore subject to VAT at 20%. In their opinion, the products ‘did not dry out like a cake would’. In the famous Jaffa Cake case, it was this fact that went in the taxpayer’s favour; a Jaffa Cake was held to be a cake and not a chocolate covered biscuit. Despite appealing directly to HMRC and stating that according to independent lab tests the products did dry out, HMRC upheld their decision.
Where businesses are established in the EU but have suffered VAT in other Member States where they are not required to be registered, the EU Eighth Directive allows VAT to be claimed back from other Member States using a standardised procedure. Recent Case Law - “Taking the Biscuit” Most VAT case law in the Manufacturing sector appears to relate to food and whether the product being manufactured should be zero rated or standard rated. The VAT rules are extremely complex and if not assessed correctly, can be both reputationally and financially damaging to the business concerned. One recent case, DuelFuel Nutrition Ltd v HMRC, has resulted in the taxpayer having no option but to sadly close their business.
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First Tier Tribunal DuelFuel filed an appeal against HMRC’s decision with the First Tier Tribunal. Even though the Tribunal referred to the independent lab tests and stated that the products ‘tended to dry out when exposed to air’ this did not affect the final judgement. At the Tribunal, it was first considered if the products were cakes according to VAT legislation. As there is no statutory definition of cake, the Tribunal adopted a multi-factored test to do this. This included looking at the nature and description of the products, ingredients used, manufacturing process, size, appearance, taste, texture packaging, marketing and in what circumstances they would be consumed. The Tribunal concluded that even though the products looked like cakes, the ingredients used in making them, the taste, and the packaging, marketing and pattern of consumption were such that an ordinary person would not consider them cakes.
It will be interesting to see how the widening of the definition of confectionery will impact on other similar products being manufactured and the increasing difficulty taxpayers will face in trying to obtain zero rating. If you would like to speak to our team about a VAT matter, please contact hello@scruttonbland.co.uk or call 0330 058 6559.
The taxpayer then argued that if they were not cakes, they could not be considered confectionery either. Under the legislation, confectionery is defined as “not including cakes or biscuits other than biscuits wholly or partly covered with chocolate or some other product similar in taste and appearance” and a further Note 5 in the legislation states that “confectionery includes chocolates, sweets and biscuits; drained, glace or crystallised fruits; and any item of sweetened prepared food which is normally eaten with the fingers”. The Tribunal stated that as the products were an ‘item of sweetened prepared food which is normally eaten with the fingers” this was sufficient to classify them as confectionery, but the taxpayer disputed this stating that despite this, the products must be “similar to the other items in Note 5 such as chocolates and sweets”. The Tribunal therefore relied on another case at the Upper Tribunal (WM Morrison Supermarkets) where it stated Note 5 “deems products with certain attributes … to fall within the confectionery exception” and that the wording in Note 5 “was intended to extend the definition of confectionery beyond its natural meaning”. The products were therefore deemed to be confectionery using this wider definition in Note 5 and therefore standard rated.
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Overseas Ownership – What You Need To Know
UK Statutory Reporting Obligations must be considered by all entities that are owned in part or in whole by an overseas individual or entity. It doesn’t matter if the UK operations are only a branch and not a separate company, the same consideration must be given. Thought must also be given to these requirements if you are considering external overseas investment into your business.
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Audit requirement Whether you are a UK branch or subsidiary of an overseas entity, you should consider whether an audit is required. Even where the UK company qualifies and ‘small’ (and might otherwise be able to claim exemption from audit), if the wider overseas group to which it belongs is not small then the UK company would require an audit. There still remain a large number of overseas groups that are unaware of the requirement to have the ‘small’ UK subsidiary audited. Group size is measured by reference to the following criteria, where two of the three thresholds are breached – and I reiterate, for the Group – then it is likely that the UK subsidiary will require an audit, regardless of size:
Steven Burgess, Audit Partner explores some of the key – and perhaps lesser known – areas that must be considered to ensure that you don’t fall foul of relevant UK legislation. Register of Overseas Entities The Register of Overseas Entities came into force in the UK on 1 August 2022 through the Economic Crime (Transparency and Enforcement) Act 2022. This forms a key part of the government’s strategy to tackle global economic crime. It is now a requirement for overseas entities that own UK property or land to declare their beneficial owners or managing officers. Overseas entities cannot buy, sell, transfer, lease, or raise a charge against land in the UK unless they’ve registered with Companies House. All entities on the Register must file an update statement every year to confirm the information held is correct, even if nothing has changed. Entities may face prosecution or a financial penalty if they do not file. People with Significant Control (PSC) Information on the beneficial ownership of companies has been publicly available since 2016. A PSC is someone who owns or controls your company who must be identified and the details recorded on your PSC register at Companies House.
A Relevant Legal Entity (RLE) is registrable in relation to the company if it is the first relevant legal entity in the company’s ownership chain. In the simplest of terms, an RLE is a corporate PSC; RLEs are subject to the same PSC regime conditions as individuals. There are additional rules around who can qualify as an RLE, though typically it is an entity that must keep its own PSC register or have its shares admitted to trading on certain regulated markets. Where this is not the case then you should look further up the ownership chain to identify the PSC – this often catches out those companies with an overseas beneficial owner. Detailed examples can be found on the .gov website which address this complex area of legislation.
It can result in a 2 year prison sentence, a fine or both, if a PSC is identified but not notified.
•
Turnover: Net: £10.2 million, or gross: £12.2 million.
UK branches of overseas companies A sometimes forgotten piece of legislation is in relation to the requirement for overseas companies to register in the UK where there is a UK establishment. A UK establishment is a place of business or branch of an overseas company in the UK. Beyond the requirement to register the UK establishment, the overseas owners must also send their own company accounts to Companies House. What they need to deliver will depend on what the company must prepare and disclose under ‘parent law’. Parent law is the law of the country where the company is incorporated. For example, where audited accounts are filed under parent law those same accounts must be filed with Companies House too. Even where there is no requirement to prepare, audit and file accounts under parent law, accounts must still be prepared, signed and delivered to Companies House.
•
Total assets: Net: £5.1 million, or gross: £6.1 million.
•
Average number of employees in the period: 50.
It is worth adding that the UK government announced in March 2024 its intention to increase the turnover and total assets thresholds by almost 50%. UK legislation and matters of interest for overseas owners stretch far and wide and beyond those recorded above. Our team has the expertise to help advise on any such matters, and in addition our tax advisory team regularly assists international clients on matters such as transfer pricing, corporate tax obligations, residency issues, global mobility, duty and customs. For advice in these areas please contact Steven by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk
The requirements set out clearly how to identify your PSC; most PSCs are those who hold:
•
more than 25% of shares in the company
•
more than 25% of voting rights in the company
•
the right to appoint or remove the majority of the board of directors
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Changes To FRS102: Operating Leases What does the new lease accounting model mean for lessees under UK GAAP? John Perry, Audit Partner explores the changes and shares tips on how you can start to prepare your business.
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I n March 2024, the Financial Reporting Council (FRC) concluded its second periodic review of the Financial Reporting Standard (FRS102) and issued amendments to FRS102. Whilst the revisions will apply to financial periods beginning on or after 1 January 2026, early adoption is advised. There is time to prepare, however, the impact could be significant for many businesses and an initial assessment of the implications should be done sooner rather than later. The changes move the accounting to a basis more aligned to international accounting standards. John Perry, Audit Partner explores one of the key accounting areas that will see change: operating leases.
The manufacturing and engineering sector, in particular, is typically an asset heavy sector – the acquisition of such assets will be from excess cash or finance – typically a loan or lease. Depending on the nature of the lease this will either be recognised on the balance sheet (a finance lease or HP) or expensed through the profit and loss account (an operating lease). The new approach follows that of IFRS 16; Leases, and more leases will be recognised on balance sheet as the distinction between operating and finance leases has been removed. In respect of those leases previously recognised as an operating lease, the standard brings in a liability reflecting the obligation to make payments over the lease term and an associated right of use asset. The lease liability is discounted to reflect the time value of money with the rate of discount being based on the interest rate implicit in the lease. If this cannot be determined, the lessee can choose to apply their incremental borrowing rate or their obtainable borrowing rate. The income statement will see charges relating to the depreciation of the right of use asset and the interest element of payments. There are exemptions available, but these are limited to short terms leases (12 months or less) and leases of low value assets. All other assets will be recognised in line with the revised standard and will include assets such as property, machinery, cars, fleet, etc.
As profits and net debt could be impacted by the new requirements an early assessment of the implications is key to allow proper planning and communication on matters such as:
•
Finance team readiness and the need for appropriate training to ensure that the new requirements are fully understood, not just the accounting but also the financial statement disclosure requirements. Systems to ensure these can deal with the incoming changes, if nothing else it is likely that the existing chart of accounts would need to be updated and reviewed. Covenants and the impact of changes to profits and net debt on the current headroom.
•
•
•
The timing and amount of corporation tax payments.
•
Remuneration strategies and whether revisions may be required to arrangements linked to financial performance (performance related pay, bonuses or share options). Corporate transactions and what the impact could be on earn out agreements.
•
The implementation date may feel like it is some way off, however, the impacts need to be understood to enable appropriate implementation plans to be put in place and to ensure that the expectations of stakeholders are appropriately managed. If you would like to discuss how these changes may affect you, and what you need to do to prepare, do get in touch today to find out more. Email John Perry at hello@scruttonbland.co.uk or call 0330 058 6559.
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Meet The Team Our team of Manufacturing & Engineering specialists regularly advise a wide range of corporate and owner managed businesses, from small to large manufacturers, engineers, as well as importers of manufactured goods and have a thorough understanding of the opportunities and challenges facing the industry.
We seek to build long-term, trusted relationships with our clients. It is important to us that we understand our clients’ business and personal aims and objectives, in order that we can provide bespoke and personal advice.
Get in touch with a member of the team to see how they can help you.
Steven Burgess Audit Partner steven.burgess@ scruttonbland.co.uk 01473 945870
Chris George Tax Partner chris.george@ scruttonbland.co.uk 01473 945836
Paula Mason VAT Manager paula.mason@ scruttonbland.co.uk 01473 945823
Luke Morris Corporate Finance Partner luke.morris@ scruttonbland.co.uk 01473 945731
Emma Clifton Business Advisory Partner emma.clifton@ scruttonbland.co.uk 01473 945764
John Perry Audit Partner john.perry@ scruttonbland.co.uk 01473 945872
Ryan Pearcy SB Digital Associate Partner ryan.pearcy@ scruttonbland.co.uk 01206 417218
In 2024, Scrutton Bland became part of Sumer – a collaboration of the best regional accountancy practices with a shared vision to champion local small to medium-sized enterprises. By bringing together the best in business services, Sumer retains the value that community-based practices offer and combines this with the scale, breadth of expertise and technologies that only a national organisation can muster.
To find out more about Sumer, visit our website: www.sumer.co.uk
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