How to prepare for plastic packaging tax and other tax changes

By Andrew England & Anna Johnston

- Last updated on GMT

England and Johnston: 'Plan ahead'
England and Johnston: 'Plan ahead'

Related tags Packaging & labelling Finance

The plastic packaging tax - due to be introduced on 1 April 2022 - is one of a few tax changes that could have significant financial impact on food manufacturers in the coming months.

Designed to encourage more businesses to invest in using recycled plastics, the tax could have cost implications for food manufacturers that consume large volumes of plastic.  

Through effective planning, including three-way forecasting, companies can adapt their operations in good time and avoid unwanted cashflow gaps or reduction in profitability. 

From 1 April 2022, the plastic packaging tax will apply at a rate of £200 per metric tonne for UK businesses that manufacture or import 10 tonnes of plastic packaging a year.

At least 30% recycled plastic

The tax will apply to packaging containing more plastic by weight than any other single material. The definition includes biodegradable and compostable plastics. Packaging containing at least 30% recycled plastic is exempt. 

At a time when the sector faces significant inflationary pressures affecting the price of goods, energy and materials, along with growing demand for wage increases, the tax represents another additional cost for businesses falling above HMRC’s threshold. 

Other tax changes facing food manufacturing businesses in the coming months include a 6% increase in corporation tax from April 2023 and a 1.25% increase in Employer’s National Insurance Contributions (NICs) from April 2022.

Administrative burden

The introduction of the plastic packaging tax will also lead to an increased administrative burden for food manufacturers. Those consuming more than 10 tonnes of plastic per year will need to register for the tax, even if they are not eventually liable to pay it.

This includes importers of packaging already containing goods, for example, plastic drinks bottles. Companies will also be required to provide declarations within customer invoices, confirming the tax has been paid. To do this, they may need to make changes to their accounting systems. 

To prepare, it’s vital that all food manufacturing businesses keep accurate records of the packaging they manufacture or import, even if it contains more than 30% recycled plastic. Businesses manufacturing or importing less than 10 tonnes of plastic packaging a year will still need to maintain records, showing they are below the threshold, in case of a future HMRC investigation.

Manufacturers close to HMRC’s threshold should consider whether there are any changes they can make to packaging they manufacture or import, with the aim of including at least 30% recycled plastics.

Research & development

Close collaboration with suppliers can provide organisations with a better chance of getting ahead and reducing plastics use. This process can represent an opportunity for investment in research & development; finding innovative solutions for increasing the volume of recycled plastics used could enable eligible businesses to claim valuable R&D tax incentives.  

For companies whose management information is focused on a historic profit and loss basis rather than forecasting forwards, reaction to incremental tax changes can often be delayed, substantially impacting profitability and cashflow.   

Three-way forecasting, which involves combining data for a business’ profit and loss, balance sheet and cashflow projections, can help manufacturers predict the financial impact different scenarios could have. For example, by inputting cost data based on a scenario that they fall above HMRC’s threshold for the plastic packaging tax, decision-makers can spot potential cashflow gaps and take steps to mitigate them.

Negotiate or pass costs on

Through negotiation with suppliers, it may be possible for businesses to freeze short-term price increases for products and services or improve credit terms, providing greater breathing space. Alternatively, it may be necessary to pass additional costs to customers by way of increased prices. 

With the majority of food manufacturers set to pay more taxes in 2022, it’s important that businesses consider the bigger picture for their financial position. By planning ahead now, using three-way forecasting and exploring ways to make packaging more eco-friendly, they can mitigate negative cashflow impacts associated with the plastic packaging tax, while becoming more sustainable organisations.

Andrew England is a partner and Anna Johnston is a senior manager at accountancy firm, Menzies LLP.​   

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