Manufacturing Sector Breakdown

All other manufacturing – raw materials

All other manufacturing captures a large number of smaller subsections, grouped by the SIC code system to reduce the number of company categories and also by their likeness. They are mainly involved in working with a variety of raw materials like plastics and metals.

Given the diverse nature of the companies in this sector, it is perhaps not surprising that the group is very similar to the overall average with relation to revenue growth.

Coke, petroleum, chemical and pharmaceuticals

After two years of high growth, this sector saw a slowdown in revenue growth in 2018. The oil and gas price bottomed out in 2016, although given the nature of long-term contracts in this sector the impact of market change is often delayed. It was not until the 2017 financial year that businesses halted recruitment and actually reduced headcount (minus 0.04%) ahead of 2018 when the revenue growth levels slowed significantly, dropping from 14.94% in 2017 to 6.16% in 2018.

There is evidence that the oil and gas market is making a strong recovery, although it will not be until 2020 and 2021 we see that reflected in performance results for this supporting sector. Levels of confidence in 2018 are visible by the increase in headcount once again up to 5.54%.

Textiles and leather

The textiles and leather sector had fairly consistent growth rates although Gross Project is declining. Net Profit as a percentage has remained consistent, suggesting the sector has controlled overhead spend to maintain profit levels. This has not been through cutting headcount however as the EBITDA per employee has reduced. In a sector with growing revenue, this would suggest that the level of new recruitment is higher than the growth in revenue.

Computer, electronic and light electrical

Computer, Electronic and Light Electrical manufacturers experienced a more consistent, and slightly higher, growth in revenue over the last three years compared to the overall sector, although the increased spike in 2017 (9.88%) was not as significant as machinery and coke (14.94%).

The stability of revenue growth is also matched by fairly consistent margin levels across the last 3 years with only slight decreases in net profit.

This subsection generates a slightly higher level of net profit than the sector average (7.93% vs 6.03%), but interestingly has a much lower level of EBITDA per employee. This suggests that this subsection is more labour intensive and less capital intensive than the other subsections.

Machinery, vehicle and transport

Companies involved in the manufacture of machinery, vehicle and transport saw a decline in revenue from 13.33% in 2017 to -10.39% in 2018.

The sector has had a consistent NP% which demonstrates businesses have reacted well to decline in revenue in 2018, reducing overheads accordingly to defend profitability.

Corporation Tax

The corporation tax rate reduced with effect from 1 April 2017 from 20% to 19%. As the companies included in the dataset will all have reported under either IFRS or FRS102, the tax charges reported will be “total tax charges” made up of both current tax and deferred tax and so would be expected to be at 19% (or 20%).

However, the factors which typically would have resulted in tax charges of less than 19% (or 20%) would typically be (1) permanent differences such as Research & Development tax reliefs or Patent Box, which reduce current tax without an impact on deferred tax (2) the recognition of deferred tax at 17% which was the corporation tax rate which was expected to be in force with effect from 1 April 2020.

However, the new Conservative Government is expected to either scrap or delay the reduction of the corporation tax rate from 19% to 17%, and therefore we will expect the in both 2019 and 2020 to remain similar to those reported in 2017 and 2018. HMRC’s corporation tax statistics commentary shows that the average “cash tax” rate in the manufacturing sector is approximately 10% with the balance of the tax rate to the average charge of approximately 17% being made up of deferred tax movements. This can be explained by HMRC’s corporation tax statistics which show that the manufacturing sector is the biggest beneficiary of capital allowances (however relief in the form of capital allowances has a deferred tax impact and so typically will not cause a reduction in a tax rate under a total tax charge).

Tax reliefs

Tax rates are close to the standard corporation tax rate, as would be expected with a “total tax charge” as calculated under IFRS or FRS102. However, HMRC’s corporation tax statistics for the manufacturing sector show that the “cash tax” paid by the sector (ie actual corporation tax paid in the manufacturing sector divided by total profits for the manufacturing sector) are approximately 10%. This is one of the lowest average “cash tax” rates across the 18 major business sectors that HMRC report upon. This can be explained by the fact that manufacturers typically benefit from a range of sector focused tax reliefs such as: R&D, Patent Box and Capital Allowances.

Thoughts from the experts

Decarbonisation of the Oil and Gas sector will be required if the UK is to meet its ambitious targets under the Climate Change Act. Although this industry may be somewhat under threat from the need to phase out their main source of revenue, opportunities also exist in areas like alternative fuels and carbon capture and storage. For example, the Acorn project in Scotland aims to produce hydrogen from natural gas while capturing the associated carbon dioxide emissions. They will then use existing North Sea pipeline infrastructure to transport and permanently sequester the CO2 in a former oil and gas reservoir.

Matt Rooney
Institution of Mechanical Engineers

It is certainly the case that productivity growth has been weak for some time. This again is not just a UK phenomenon but is worldwide. However, the UK has seen one of the most pronounced slowdowns. Brexit may have had an impact of late as it has discouraged firms from investing in productivity boosting machinery. However, the productivity slowdown predates any talk of Brexit.

Rhys Herbert
Lloyds Bank Commercial Banking

This article comes from our latest Manufacturing & Engineering Survey Report, now in its eighth year, is a go-to report when it comes to understanding the sector, its opportunities and challenges. We benchmark SMEs across the UK to paint a national picture of the Manufacturing and Engineering sector.

Click here to read a copy of the full report.