Mark Bryant, business director, Business Growth Fund issues a call to action and highlights how manufacturers can get their hands on cash for investment in the first place.
Fast facts
What is the Annual Investment Allowance? The amount of investment in plant and machinery that a business can make each year on which it can claim tax relief in the year of investment. If a business invests more than the amount of the AIA in plant and machinery in a year, then the tax relief for the cost in excess of the AIA is spread over a long period.
How does the enhanced AIA make a difference? Prior to the change, if you invested £100,000 in plant and machinery in a year you would get tax relief on £25,000 in year one (the amount of the AIA). Tax relief for the remaining £75,000 would spread over future years. With the new limit of £250,000, the business would get tax relief on £100,000 in year one (the full amount) thus accelerating the tax relief for their investment. Information supplied by Carpenter Box Llp.
Here’s a suggestion for any manufacturing business pondering its priorities for 2013: think very hard about how you can exploit the Chancellor’s generous increase in capital investment allowances.
George Osborne’s Autumn Statement included a 10- fold increase in the annual investment allowance (AIA), which could prove hugely valuable to manufacturers with ambitions to grow.
The AIA, which has been increased from £25,000 to £250,000, gives 100% tax relief on all qualifying spending in the year it is made. It allows businesses to deduct the full value of their investments – on new equipment or replacements for existing kit – from their total taxable profits. Effectively, it enables businesses that invest to recoup part of the cost of doing so with a tax saving.
Any business that fails to invest will eventually find itself in trouble, but for manufacturers, which need the latest equipment in order to remain competitive, the danger is particularly acute. When manufacturers don’t invest they stagnate – and in the end they die.
Is it easy to claim AIA?
Tax incentives for business investment are welcome, but they can be accompanied by bureaucracy and red tape which are off-putting, particularly for smaller firms.
Not so with AIA says Andrew Churchill, MD at £18m turnover JJ Churchill. “We have single pull assets which are tracked and depreciated individually. A final tax calculation then pulls that all together and resolves our submission for HMRC. I believe this kind of capability is increasingly common as companies invest in information management systems to assist with costing.”
British businesses are already lagging many of their international rivals in the use of machine tools, a key indicator of manufacturing investment. We’ve now slipped behind Switzerland, Turkey and Mexico according to research published in 2012 by Lombard (p77), the asset finance subsidiary of Royal Bank of Scotland (p80).
Businesses in this country are missing out on contracts worth £2.3bn a year because of their reluctance to invest in new capital equipment, Lombard’s research suggested, with 40% of businesses having had to turn down new orders because they haven’t been able or willing to invest in the capital equipment required to fulfil them.
Who has BGF worked with?
BGF has a growing track record of investment in UK manufacturing firms.
M Squared Lasers: BGF invested £3.85m of growth capital into this Glasgow-based technology company. Some of the money is funding expansion of the company’s research and development programme, as well as expanding the manufacturing capacity.
STATS: BGF invested £7.8m in this oil services business based in Aberdeen. The capital is funding the building out of STATS’ specialist isolation devices, as well as enabling the company to expand its international footprint.
Cennox: This Surrey-based firm supplies parts for ATMs, including its own patented anti-fraud device. BGF invested £3m in the company in order to help Cennox boost working capital, take on new staff and expand internationally.
In addition, failure to invest not only risks missing out on new business, but may also undermine the profitability of existing contracts. Outdated machinery is more expensive to maintain and becomes progressively less efficient as it ages.
Manufacturers therefore ought to seize upon these newly-increased capital allowances – part of a wider network of incentives designed to encourage businesses to invest. Additional allowances are available for green investment, for example, while a new scheme offers tax credits for spending on research and development. The Patent Box, which protects profits generated by new technology from tax, is another important development that may appeal to many manufacturers (p75).
No cash at the ready?
However, while it is all very well to say that capital allowances compensate manufacturers for their capital spend post facto, there is the issue of where the cash for investment will come from in the first place.
One reason why investment rates have slipped is that many businesses are very nervous about economic volatility. Even those manufacturers with cash on the balance sheet wonder whether they ought to be saving it for a rainy day, rather than embarking on ambitious investment schemes.
Businesses are even more anxious about the idea of borrowing in order to invest – not least because of a widespread perception, accurate or not, that they will be turned down for credit. And while the asset finance sector is growing in importance, it may not meet manufacturers’ needs in full.
BGF may be able to help solve these problems. The long-term equity finance we provide is well-suited to capital investment plans, for which the business case often works best over much longer time periods.
We are looking for companies that can demonstrate their ability and desire to grow rapidly. We want to find companies with well thought-out business plans who can articulate how they might use BGF’s investment to boost growth for the long term – exactly the type of businesses most likely to have ambitious investment ideas. We will invest between £2m to £10m in businesses with an annual turnover of between £5m and £100m. We only ever take a minority stake in companies; we are building not buying businesses.
Business Growth Fund was established to help Britain’s fast growing SMEs. BGF will invest between £2m and £10m in a business seen to have growth potential but which needs access to capital.
BGF is an independent company with capital of up to £2.5 billion, backed by five of the UK’s main banking groups – Barclays, HSBC, Lloyds, RBS, and Standard Chartered. BGF is managed completely autonomously with an independent management team.
Members of TM’s Manufacturer Directors Forum have the chance to meet BGF executives at a range of exclusive dinner debates throughout 2013.
To find out how to join the forum contact Grace Gilling on 0207 401 6033.