Q&A - Automotive: a taxing environment driven by challenges
Q&A - Automotive: a taxing environment driven by challenges
The automotive sector has taken quite a hit in recent years. The list of challenges is long and well documented – whether it’s Covid, the war in Ukraine, supply chain pressures, the cost-of-living crisis, soaring inflation, not to mention Brexit, which still has its own part to play in how the sector functions.
The result of these combined issues has led to rising costs, delays and disruption throughout the supply chain, and a fall in demand as consumers feel the pinch. “It’s not been an easy couple of years for the industry,” says Matthew Clark, Partner, Customs, Excise and International Trade Services at BDO LLP.
“The good news is, the automotive sector is starting to bounce back as the economy slowly starts to improve, with inflation falling, and the cost-of-living crisis beginning to ease.”
As with many industries, while the outlook is improving, there are still many factors at play in creating a favourable trading environment, not least of which is around Government support.
Prior to the Autumn Statement, 39% of manufacturing businesses – surveyed as part of BDO’s bi-monthly Economic Engine report of 500 mid-market businesses - said they wanted the chancellor to cut the headline rate of corporation tax once economic conditions improved, with nearly a quarter (23%) calling for ‘full expensing’ to be made permanent after March 2026.
The Government’s stance has changed quite dramatically in recent months, after Jeremy Hunt said it was ‘virtually impossible’ to make any tax cuts, during a period when taxes have risen for businesses by more than 20%. But as the economic environment now looks brighter, he insisted he wanted to put the country on “the path to lower taxes” but would “only do so in a responsible way”. In the end, his Autumn Statement went part way to appeasing businesses. The focus was clearly on “removing barriers of investment” to help grow the economy, as the chancellor announced what he described as “the biggest ever boost for business investment in modern times”. But did it leave the manufacturing and automotive sectors asking for more?
In light of the Autumn Statement, Matthew Clark, Chris Rowe, Indirect Tax Partner, and Stephen Cooney, Head of Automotive Manufacturing at BDO, discuss key areas the automotive sector needs to think about from a tax perspective, starting with the chancellor’s announcement.
“In what is an increasingly complex trading environment, you also have the issue of the EU Carbon Border Adjustment Mechanism (CBAM), which came into effect in the EU on 1 October 2023. The regime requires EU businesses to report when they import certain carbon intensive goods from outside the EU, adding additional reporting and red tape for importers and suppliers. With an intention to report back on the CBAM consultation paper noted in the Autumn Statement, there’s no doubt that the UK will follow suit in introducing such requirements on goods such as aluminium, iron, and steel.”
This sentiment is mirrored in the latest Economic Engine statistics, with 85% of manufacturing companies agreeing that the UK should introduce similar rules and taxes to prevent companies from offshoring their carbon emissions.
Chris: “From a research and development (R&D) perspective, the chancellor’s announcement expands and simplifies the available tax incentives for growing businesses by merging the SME and RDEC research and development incentives from April 2024. This will reduce the administrative burden for manufacturers as well as provide more consistency in their R&D claims as they grow. However, for some SMEs overall this could mean a fall in the effective rate of relief available post April 2024, so the new rules should be considered closely.
“The £4.5 billion of direct investment in strategic sectors, including automotive and aerospace, also demonstrates the Government’s focus on zero emissions vehicles and aircraft. With some of the investment allocated to the Made Smarter programme, this should allow manufacturing SMEs across the country to benefit from advanced technologies to improve productivity and reduce carbon emissions.”
Stephen: “The industry will most certainly welcome the chancellor’s announcement to make full expensing permanent after originally setting a deadline to end the scheme in March 2026.
“Billed as one of the most generous tax reliefs anywhere in the world, the chancellor clearly hopes this move will trigger a serious round of investment and help to close the productivity gap, with the overall impact of the changes expected to increase business investment by around £20 billion a year within a decade. This predictability will give businesses greater comfort as they make long term investment decisions in new technologies to improve productivity.
“What’s more, the announcement of three more Investment Zones, along with an extension of the available reliefs from five years to 10 shows the Government’s focus on levelling up regions of the UK.”
“Many announcements also sought to address shortcomings in the supply of labour, which is a common issue across the manufacturing space. A £50 million pilot to provide apprenticeships in growth sectors could help to bridge the skills gap and to smooth the adoption of beneficial technologies.”
“Understanding what components automotive manufacturers need, and keeping ahead of demand trends, is also absolutely critical and an area that really needs to improve across the sector. Undoubtedly, data analytics and forecasting will play a key role in achieving this and more focus should be placed in implementing the right systems to support this direction of travel.
“If you capture real-time, operational supply chain data, it will naturally feed into a business’ wider strategy, whether that’s about improving supply chain resilience, addressing ESG, boosting sustainability credentials, or improving its tax position. You cannot do any of this without visibility and the right management information.”
Chris: “I agree 100% with Matthew’s conclusions. There are so many benefits that can be gained from supply chain projects, and it’s essential that tax and finance teams feed into any wider reviews done by different areas of the business.
“Pillar Two, which comes into force in January 2024 and is designed to establish a global minimum tax regime, should also be high on the agenda for those multi-national enterprises (MNEs) with global revenues above €750 million. If they’ve not done so already, businesses need to clearly understand their global footprint, understand explicitly their supply chain model, and ensure they have real-time data to support the requirements and don’t end up paying double tax.
“This is all about responsible tax, robust tax planning, and supply chain optimisation.”
Stephen: “There’s no doubt that the topic of tax and technology is huge for the automotive sector, particularly when it comes to running an efficient manufacturing plant. This is where the Government’s announcement over capital allowances and extending the ‘full expensing’ scheme will really benefit those manufacturers that are honed in on driving efficiency.”
Chris: “The other big issue driving the technology agenda is around skills and, in particular, skills shortages, because the industry has simply struggled to recruit the right talent in recent years. That’s where technology can play a real part in taking away time consuming processes to “free-up” valuable talent that businesses already have for the most value-add activities. As well as on the manufacturing and operations side, tax and finance teams really need to embrace technology to help drive efficiencies and cost savings.”
Matthew: “When you mention the word ‘technology’, it can often scare people away. In fact, in some cases, we still see instances where companies are using spreadsheets to manage the flow of data. But, the fact of the matter is, automation and tax-led technology allows you to easily analyse and see what’s happening within your business in a snapshot, whether that’s looking at VAT returns or customs analytics – the power of technology is fantastic.
“Digital transformation and new technology don’t have to mean a billion-pound budget, often smaller automation solutions can be cheaper than expected and present huge gains in optimisation for a business.”
Chris: “There’s also pressure coming from HMRC on this subject, which is helping to drive change, and to Matthew’s point, this doesn’t have to require huge budgets, but must be considered strategically. Making Tax Digital is moving onto the next stage to include corporation tax by 2026, and HMRC is continuing to invest heavily in its digital capabilities. The question is: do you do the minimum to get you over the line with these new requirements, or do you use it as an opportunity to generate value from data insights, automating processes and driving efficiency?”
Stephen: “Environmental, social, and governance (ESG) is becoming a growing concern for the automotive sector, particularly from a supply chain perspective and the issue of ethical sourcing. Getting it wrong can really damage a brand’s reputation and serious questions are being asked by consumers about where critical parts are coming from and what is a business’ carbon footprint.”
Chris: “Getting to grips with all the environmental and sustainability taxes is a big challenge. There is a need to be compliant and also to ensure that the business is only paying taxes it is required to, as there is a link back to ESG and public perception of paying too much in environmental taxes.
“There are now thousands of environmental taxes globally that businesses need to be aware of, track and ensure they remain compliant with. Equally, there are thousands of sustainability incentives and exemptions globally, so there is value in businesses identifying and claiming these wherever possible.
“Whilst not a tax as such, the new EU Battery Regulation will have a big impact on the automotive industry. The new regulation requires proof of sustainable, responsible, and circular sourcing for batteries to access the European market. This will no doubt lead to additional compliance obligations for finance teams and potentially changes to supply chains that will require tax consideration and planning.”
The result of these combined issues has led to rising costs, delays and disruption throughout the supply chain, and a fall in demand as consumers feel the pinch. “It’s not been an easy couple of years for the industry,” says Matthew Clark, Partner, Customs, Excise and International Trade Services at BDO LLP.
“The good news is, the automotive sector is starting to bounce back as the economy slowly starts to improve, with inflation falling, and the cost-of-living crisis beginning to ease.”
As with many industries, while the outlook is improving, there are still many factors at play in creating a favourable trading environment, not least of which is around Government support.
Prior to the Autumn Statement, 39% of manufacturing businesses – surveyed as part of BDO’s bi-monthly Economic Engine report of 500 mid-market businesses - said they wanted the chancellor to cut the headline rate of corporation tax once economic conditions improved, with nearly a quarter (23%) calling for ‘full expensing’ to be made permanent after March 2026.
The Government’s stance has changed quite dramatically in recent months, after Jeremy Hunt said it was ‘virtually impossible’ to make any tax cuts, during a period when taxes have risen for businesses by more than 20%. But as the economic environment now looks brighter, he insisted he wanted to put the country on “the path to lower taxes” but would “only do so in a responsible way”. In the end, his Autumn Statement went part way to appeasing businesses. The focus was clearly on “removing barriers of investment” to help grow the economy, as the chancellor announced what he described as “the biggest ever boost for business investment in modern times”. But did it leave the manufacturing and automotive sectors asking for more?
In light of the Autumn Statement, Matthew Clark, Chris Rowe, Indirect Tax Partner, and Stephen Cooney, Head of Automotive Manufacturing at BDO, discuss key areas the automotive sector needs to think about from a tax perspective, starting with the chancellor’s announcement.
- Autumn Statement and what stood out from an automotive perspective
- Biggest issues facing the automotive sector from a tax perspective
- Driving efficiencies through tax technology
- Key areas which should be on the agenda for automotive businesses in 2024
- Key actions for automotive manufacturers
What should the chancellor have focused on in the Autumn Statement and what stood out from an automotive perspective?
Matthew: “Our biggest market is the EU. There’s no other single trading block, or trading partner, as important to the UK automotive industry as the European Union, with just over half of vehicles made in the UK exported to the EU. Anything in the Autumn Statement that clearly affects that relationship is crucial to the sector. Sadly, there was a distinct lack of detail concerning this vital market.“In what is an increasingly complex trading environment, you also have the issue of the EU Carbon Border Adjustment Mechanism (CBAM), which came into effect in the EU on 1 October 2023. The regime requires EU businesses to report when they import certain carbon intensive goods from outside the EU, adding additional reporting and red tape for importers and suppliers. With an intention to report back on the CBAM consultation paper noted in the Autumn Statement, there’s no doubt that the UK will follow suit in introducing such requirements on goods such as aluminium, iron, and steel.”
This sentiment is mirrored in the latest Economic Engine statistics, with 85% of manufacturing companies agreeing that the UK should introduce similar rules and taxes to prevent companies from offshoring their carbon emissions.
Chris: “From a research and development (R&D) perspective, the chancellor’s announcement expands and simplifies the available tax incentives for growing businesses by merging the SME and RDEC research and development incentives from April 2024. This will reduce the administrative burden for manufacturers as well as provide more consistency in their R&D claims as they grow. However, for some SMEs overall this could mean a fall in the effective rate of relief available post April 2024, so the new rules should be considered closely.
“The £4.5 billion of direct investment in strategic sectors, including automotive and aerospace, also demonstrates the Government’s focus on zero emissions vehicles and aircraft. With some of the investment allocated to the Made Smarter programme, this should allow manufacturing SMEs across the country to benefit from advanced technologies to improve productivity and reduce carbon emissions.”
Stephen: “The industry will most certainly welcome the chancellor’s announcement to make full expensing permanent after originally setting a deadline to end the scheme in March 2026.
“Billed as one of the most generous tax reliefs anywhere in the world, the chancellor clearly hopes this move will trigger a serious round of investment and help to close the productivity gap, with the overall impact of the changes expected to increase business investment by around £20 billion a year within a decade. This predictability will give businesses greater comfort as they make long term investment decisions in new technologies to improve productivity.
“What’s more, the announcement of three more Investment Zones, along with an extension of the available reliefs from five years to 10 shows the Government’s focus on levelling up regions of the UK.”
“Many announcements also sought to address shortcomings in the supply of labour, which is a common issue across the manufacturing space. A £50 million pilot to provide apprenticeships in growth sectors could help to bridge the skills gap and to smooth the adoption of beneficial technologies.”
Supply chain challenges have hampered the industry in recent years, but what are the biggest issues facing the sector from a tax perspective?
Matthew: “From a general point of view, the primary goal for the automotive sector during Brexit was to simply keep the supply chain moving. Now, the focus needs to be on driving efficiencies and building supply chain resilience and tax will play an important part in helping companies achieve that.“Understanding what components automotive manufacturers need, and keeping ahead of demand trends, is also absolutely critical and an area that really needs to improve across the sector. Undoubtedly, data analytics and forecasting will play a key role in achieving this and more focus should be placed in implementing the right systems to support this direction of travel.
“If you capture real-time, operational supply chain data, it will naturally feed into a business’ wider strategy, whether that’s about improving supply chain resilience, addressing ESG, boosting sustainability credentials, or improving its tax position. You cannot do any of this without visibility and the right management information.”
Chris: “I agree 100% with Matthew’s conclusions. There are so many benefits that can be gained from supply chain projects, and it’s essential that tax and finance teams feed into any wider reviews done by different areas of the business.
“Pillar Two, which comes into force in January 2024 and is designed to establish a global minimum tax regime, should also be high on the agenda for those multi-national enterprises (MNEs) with global revenues above €750 million. If they’ve not done so already, businesses need to clearly understand their global footprint, understand explicitly their supply chain model, and ensure they have real-time data to support the requirements and don’t end up paying double tax.
“This is all about responsible tax, robust tax planning, and supply chain optimisation.”
How can the automotive sector drive efficiencies through tax technology?
Chris: “As Matthew touched upon, data is key and the challenges we have mentioned above all require data to be able to analyse the tax position, meet compliance requirements and also to identify optimisation/ efficiencies.”Stephen: “There’s no doubt that the topic of tax and technology is huge for the automotive sector, particularly when it comes to running an efficient manufacturing plant. This is where the Government’s announcement over capital allowances and extending the ‘full expensing’ scheme will really benefit those manufacturers that are honed in on driving efficiency.”
Chris: “The other big issue driving the technology agenda is around skills and, in particular, skills shortages, because the industry has simply struggled to recruit the right talent in recent years. That’s where technology can play a real part in taking away time consuming processes to “free-up” valuable talent that businesses already have for the most value-add activities. As well as on the manufacturing and operations side, tax and finance teams really need to embrace technology to help drive efficiencies and cost savings.”
Matthew: “When you mention the word ‘technology’, it can often scare people away. In fact, in some cases, we still see instances where companies are using spreadsheets to manage the flow of data. But, the fact of the matter is, automation and tax-led technology allows you to easily analyse and see what’s happening within your business in a snapshot, whether that’s looking at VAT returns or customs analytics – the power of technology is fantastic.
“Digital transformation and new technology don’t have to mean a billion-pound budget, often smaller automation solutions can be cheaper than expected and present huge gains in optimisation for a business.”
Chris: “There’s also pressure coming from HMRC on this subject, which is helping to drive change, and to Matthew’s point, this doesn’t have to require huge budgets, but must be considered strategically. Making Tax Digital is moving onto the next stage to include corporation tax by 2026, and HMRC is continuing to invest heavily in its digital capabilities. The question is: do you do the minimum to get you over the line with these new requirements, or do you use it as an opportunity to generate value from data insights, automating processes and driving efficiency?”
What else should be on the agenda for automotive businesses in 2024?
Matthew: “A key issue that is still affecting the sector is around rules of origin. After coming into force in January 2021, companies have to demonstrate the originating status of goods – namely cars and their components – traded with the EU, in order to be entitled to preferential treatment under the Trade and Cooperation Agreement. The growing concern, however, is around the electric vehicle (EV) market and ensuring that electric batteries meet the rules of origin requirements. At the present time, the industry simply isn’t geared up to meet supply and demand. In fact, the EV battery market is way behind where it needs to be in the UK and the EU.”Stephen: “Environmental, social, and governance (ESG) is becoming a growing concern for the automotive sector, particularly from a supply chain perspective and the issue of ethical sourcing. Getting it wrong can really damage a brand’s reputation and serious questions are being asked by consumers about where critical parts are coming from and what is a business’ carbon footprint.”
Chris: “Getting to grips with all the environmental and sustainability taxes is a big challenge. There is a need to be compliant and also to ensure that the business is only paying taxes it is required to, as there is a link back to ESG and public perception of paying too much in environmental taxes.
“There are now thousands of environmental taxes globally that businesses need to be aware of, track and ensure they remain compliant with. Equally, there are thousands of sustainability incentives and exemptions globally, so there is value in businesses identifying and claiming these wherever possible.
“Whilst not a tax as such, the new EU Battery Regulation will have a big impact on the automotive industry. The new regulation requires proof of sustainable, responsible, and circular sourcing for batteries to access the European market. This will no doubt lead to additional compliance obligations for finance teams and potentially changes to supply chains that will require tax consideration and planning.”
Key actions for automotive manufacturers
- Supply chain – focus on driving efficiencies and building resilience by having a clearer picture of your current model through robust data analytics and forecasting. Don’t miss the opportunity to consider tax to ensure compliance and also that both current and any future supply chain models are tax efficient.
- Tax technology – this is an area that should be embraced by businesses to ensure compliance but also to drive additional efficiencies and cost savings. Technology can also play its part to address skills shortages and recruitment challenges in the finance function.
- Investment – assess how ‘full expensing’ may affect your business and whether this mechanism will enable you to invest in key areas of your manufacturing plant, such as automation and technology.
- ESG – don’t pay ‘lip service’ to the vital global issue. Speak to professional advisors about how you can effectively engage with ESG across each aspect of your business.
- Tax, tax, and more tax – the world of tax is complex and ever-changing. Ensure you are on top of, even ahead of, developments affecting your business and the sector, whether that’s Pillar Two, CBAM, Making Tax Digital or the growing number of environmental taxes!