UK: Manufacturing outlook 2004/05 - More bang for your buck

Last Updated: 13 October 2004
Article by Julian Thomas

Most Read Contributor in UK, August 2017

Integrated tax planning is a smart way to leverage your supply chain. We believe it’s a trick that’s too good to miss.

In a bid to secure competitive advantage, we are all striving to lower our cost base and improve bottom line performance. Streamlining supply chain systems and processes can deliver a vital combination of reduced stock levels and lead-times, reduced WIP, better asset utilisation, improved use of production sites, increased productivity and superior service to customers.

But what if the financial benefit of these initiatives could be improved long-term? By limiting your field of vision to operations alone, you could be missing a trick – the smart companies are leveraging their supply chains through integrated tax planning and proactively managing a business cost which is often ignored.

A reduction in taxation levels can have a substantial impact on the P&L, and fast. A manufacturer with a turnover of £500m and 7 manufacturing sites could typically expect to save in the region of £10m annually in tax efficiencies by appropriately structuring manufacturing, distribution and sales functions. Imagine the amount of supply chain streamlining you would have to do to realise similar results through cost reduction projects or revenue generation initiatives alone.

Optimising your supply chain through tax efficient restructuring means designing business processes which are both operationally and tax efficient. The critical success factor is ensuring that the tax opportunities presented by a supply chain project are identified at an early stage and developed as an integral part of the project and that the tax team pinpoint and plan around any possible tax risks which may arise.

The benefits: One plus one equals four...?

An optimised supply chain can reduce operating costs by up to 20%, with benefits derived from:

  • Standardisation of processes across sites to allow sharing of best practice.
  • More efficient performance.
  • More effective control.
  • A lower cost base, creating a significant source of competitive advantage.
  • Introduction of shared services.
  • Harmonisation of systems across sites to facilitate consistent data standards for financial and management reporting.

Likewise, tax integrated projects can expect to shave significant amounts off your corporate tax liabilities. So why not create synergies by linking together the two concepts? By harnessing the combined knowledge of tax planners and supply chain experts, incremental savings can be realised which are significantly higher than the aggregate of the individual projects.

The supply chain processes adopted by a business will depend upon its structure and strategy. Likewise the optimum tax structuring needs to be tailored to the organisation. It is however not a huge departure to align the new business process model to an optimised tax structure, giving consideration to VAT issues and transfer pricing, and identifying the key drivers affecting profitability including purchasing, sales, manufacturing and logistics.

Your objective must be to balance the tax requirements with the commercial needs of the business, achieving statutory and fiscal compliance whilst minimising the impact on day to day operations. To deliver the tax benefits, a degree of centralised control and risk management must be demonstrated – smart restructuring however will avoid the need for large-scale relocation of people. In any case, central visibility is a key component of an optimised supply chain, giving enhanced planning capability across the network.

Undoubtedly, this is a major programme of work but the returns are greater than a supply chain project alone can deliver. The tax efficiencies can also make your investment pay back rapidly allowing you to justify additional improvement projects which you could not otherwise afford to undertake, thereby further enhancing the longterm competitive advantage.

But would it work for us?

A tax efficient supply chain may be a significant opportunity for your organisation if one or more of the following applies:

  • your operations span several countries;
  • you have a complex supply chain e.g. multi product, multiple manufacturing sites;
  • you have an annual turnover of more than £100m across the territories in scope;
  • your organisation is in profit – if you are not generating profit, the losses will be incurred in a low tax jurisdiction; or
  • you feel your organisation would benefit from a supply chain restructure, process improvement programme or a management information system upgrade – in other words, the supply chain has yet to be optimally conceived.

Can you afford to overlook this opportunity?

A combined supply chain and tax redesign can result in:

  • a more efficient business;
  • a tax structure which maximises the financial returns of the commercial reorganisation; and
  • rapid payback making the project self-funding.

Case Study

This global manufacturer of engineered products operates seven production sites and sells through a global network of sales affiliates. Under the new tax efficient structure, the management function (principal) is located in Ireland, and controls all aspects of the supply chain, including sourcing & purchasing, demand planning, distribution and quality assurance. Services such as warehousing, marketing and R&D are provided locally under Service Level Agreements between the local sites and the principal.

The activities of each party were defined in the new model and priced accordingly. Major trading risks are now assumed by the Irish principal and as such the majority of the profit will arise in that entity. The tax structure supports the commercial needs of the business and the profit generated will benefit from the low Irish tax rate with an anticipated saving of £6m p.a.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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