COVID-19 has magnified the variety of commercial and geopolitical opportunities and challenges that the Defence & Manufacturing sector is having to deal with. Perhaps no surprise then that Tax has an increasingly important part to play for companies considering investment opportunities and drivers of future growth. Governments are looking to recover the fiscal deficits left by the pandemic and against a backdrop of global trade tensions and international tax reform, it’s no surprise there is increased tax authority scrutiny. From a tax perspective, as businesses aim to evolve and look at how they invest, business leaders need to consider how they earn and distribute profits and deploy capital.
We are having many conversations with clients in the Manufacturing and Defence sector on how they can use tax to enable future growth, unlocking the opportunities presented to them through the incentives available. Navigating a complex tax landscape is key to a successful investment strategy for growth.
A complex tax landscape
But clearly, with so much change and transition taking place, it’s an extremely busy time for tax leaders and functions. With limited resources available and an ever-lengthening to do list, the key question becomes what should tax teams be focusing on as a priority and how can they optimise the way they interact and work with the wider business?
It’s fair to say that there are probably three hot areas at the moment for tax functions in the sector. Firstly, investments. Tax needs to partner with the business to ensure that the best possible returns on investment are being achieved, especially in areas like R&D and new capital expenditure (with enhanced capital allowance rules announced earlier this year).
Secondly, tax needs to help drive better cost and process optimisation in the organisation – in areas such as VAT, working capital, the effectiveness of legal entity group structures, and controls around operational transfer pricing.
A third area of growing focus is responsible business, which also links to the ESG agenda. There is recognition of the responsibility to pay a fair share of tax to support the recovery post-COVID as part of the effort to ‘build back better’. Authorities for their part are demanding more tax data and transparency, while tax rates are starting to go up. The tax function can also play an important role in supporting the business become more sustainable in line with the low carbon agenda – such as by helping unlock incentives for decarbonisation.
Add in tax reform such as BEPS 2.0, tax reporting requirements, the US tax reform, digital transformation programmes, the tax implications and ramifications of remote and hybrid working, customs rates, Brexit and more – and the tax workload has probably never been greater, expected to do more with less.
A strategic partner to the business
This just underlines how important it is that the tax team has a seat at the business table alongside other commercial and financial functions. Tax needs to be integrated into continuous business planning – not an afterthought that is picked up later. This makes genuine financial sense. For example, if tax is embedded into R&D project approval processes as they happen, it is much easier to capture all the data and information needed – and therefore to maximise the value of the claim. If it’s left until several months afterwards, this is much more challenging. Likewise, in deal scenarios it’s hugely more effective if, rather than being confined to due diligence and risk issues, the tax team is fully integrated into the discussions around synergy planning, people impacts and integration.
So, tax needs to be a partner with the business. This also means balancing opportunity and risk advice. Often, tax can be accused of being the blocker to a project or initiative – the reason why something can’t be done. Whilst risk mitigation and advising on any downside fiscal implications is an important part of tax’s remit, tax teams should also try to act as facilitators who can enhance the cost benefits and return on investment for the business. There are opportunities in tax where teams can take advantage of incentives and investments that support growth and maxise value.
Powering up the tax and investment strategy
But then when it comes to the question on just how tax levers can power business investment strategy, from our experience we felt that for industrial manufacturers there are three steps that can be taken to support business growth, reduce risk and increase ROI.
- Maximise return on capital investment
- Drive cost and process optimisation
- Power responsible business
To understand how you can make the most of new and existing tax legislation to support the investment strategy, take a read of our e-book here.
The future of the tax workforce
Tax leaders also need to ensure they are building a tax function of the future. Due to the pace of change around us, the skillsets and capabilities needed are evolving. Communication skills, collaboration and co-working abilities, technology know-how - all are becoming essential.
We used to think of tax professionals as tax people with business skills. In the future, the emphasis may shift to being business people with tax skills – a sign of how tax needs to be a genuine business partner to other functions in the business, adding value and insight on a continuous basis.