Accountants for Manufacturers: The Questions a Factory's Accounts Never Answer

You can read your year-end accounts from top to bottom and still not know what one finished unit costs you. The accounts tell you that the factory turned over £1.4 million and made £350,000 of gross profit. They do not tell you which of your four product lines carried that margin, which one is sold below cost because the overhead absorbed into it was guessed at three years ago, or what the machine you are about to order is actually worth once tax is taken into account. That is the gap, and it is the reason manufacturers end up looking for something more than a compliance service.

The number your year-end accounts cannot give you

Statutory accounts are built to a legal format for Companies House and HMRC. They aggregate. Materials, wages and overheads land in a small number of lines covering everything you made in twelve months, which is exactly what a filing needs and exactly the wrong shape for a pricing decision.

The unit cost question sits underneath three separate things that have to be right before the answer means anything:

• Materials consumed, which is opening raw materials plus purchases less closing raw materials, not simply what you bought.
• Direct labour, which is the shop-floor time genuinely attributable to production, not the whole payroll.
• Absorbed production overhead, which is the rate you spread factory rent, power, maintenance and supervision across output. Set that rate on last year's volume in a year when volume falls and every unit is quietly under-costed.

Add work in progress at each end of the year and you have the cost of goods produced. Take it out of sales and you have a gross margin you can trust, by line rather than in total. Most factories we see can produce the top-level figure and cannot produce it by line, which is a management accounting problem before it is a tax problem. The mechanics of building that number, and of valuing work in progress and year-end stock so it survives an inspection, are set out in our page on manufacturing costing, work in progress and year-end stock.

What a manufacturing accountant is actually being asked to answer

It helps to separate the work into the questions rather than the services, because the questions are what you are paying to have answered.

The question	What has to be built to answer it
What does this unit cost, and which lines pay for themselves?	A costing model: materials consumed, direct labour, a defensible overhead absorption rate, work in progress at both ends
What is my stock and part-finished production worth at the year end?	A counted and valued stock figure at the lower of cost and net realisable value, with the basis written down
What will this machine cost me after tax?	The capital allowance position for the specific asset, in the specific period, against the marginal rate you actually pay
What do I owe, and when?	Corporation tax or income tax on the computed profit, VAT quarterly, payroll monthly
Can the business fund the next order book?	Cash forecasting against the working-capital cycle, which in manufacturing is long because cash sits in materials and part-built goods

The last row is where manufacturing differs most from a service business. You pay for steel, castings or components now and get paid for finished goods months later, so a growing order book consumes cash rather than generating it. Where that cycle needs bridging, our page on invoice finance for manufacturing covers the funding side.

Corporation tax on a factory's profit in 2026/27

A manufacturing company pays corporation tax on its taxable profit, which is accounting profit adjusted for tax: depreciation added back, capital allowances taken instead, disallowable items removed.

For the financial year 2026 the small profits rate is 19% where augmented profits do not exceed £50,000, and the main rate is 25% where they exceed £250,000. Between those limits marginal relief applies, calculated with the standard fraction of 3/200. The practical consequence matters more than the mechanism: in the band between £50,000 and £250,000, every additional pound of profit is taxed at an effective marginal rate of 26.5%, and every pound of relief you claim inside that band is worth 26.5p rather than 25p.

Two points catch owner-managers. The £50,000 and £250,000 limits are divided by the number of associated companies, so a property company or a second trading entity you also control will halve them. And both limits are time-apportioned for accounting periods shorter than twelve months.

Capital allowances when you buy machinery

Depreciation is not deductible. Capital allowances replace it, and 2026 is the year the rules move, which makes the timing of a purchase worth checking before you commit.

• Annual Investment Allowance (AIA): £1,000,000 per 12-month period, giving 100% relief on most plant and machinery. Available to companies and to unincorporated businesses. It is time-apportioned for short periods and cannot be carried forward.
• Main-rate writing-down allowance (WDA): 18%, falling to 14% from 1 April 2026 for corporation tax and 6 April 2026 for income tax (Finance Act 2026 section 28). A period straddling that date uses a hybrid time-apportioned rate.
• Special-rate pool: 6%, unchanged. This is where integral features live: electrical systems, cold and hot water, heating, lighting, air and ventilation, plus long-life assets. On a factory fit-out a large slice of the spend lands here rather than in the main pool.
• 40% first-year allowance on new and unused main-rate plant and machinery bought on or after 1 January 2026 (Finance Act 2026 section 29), available to companies and unincorporated businesses. Second-hand assets and cars are excluded.
• Full expensing, companies only: 100% on new main-rate plant and 50% on new special-rate plant, with no ceiling.

Where the AIA covers your spend, it is normally the simplest and the most generous, because it relieves the whole cost immediately rather than leaving a balance in a pool that then unwinds at 14% a year. The 40% first-year allowance becomes the interesting one once annual capital spend runs past £1,000,000, which for a plant reinvestment year is not unusual. The ordering rules, the special-rate split on a fit-out and the balancing charges when you sell a machine are worked through on our page covering plant and machinery capital allowances for manufacturers.

A worked factory year you can recompute

Fergus runs a precision engineering company in Telford with eleven staff. Its year ends 31 March 2027, so it falls wholly after the April 2026 changes. Every figure below comes from the rates already stated on this page.

Line	Amount	How it is derived
Sales	£1,400,000	Given
Materials consumed	£560,000	Given
Direct labour	£280,000	Given
Production overhead absorbed	£210,000	Given
Gross profit	£350,000	1,400,000 less 1,050,000 (25% gross margin)
Administrative and selling overheads	£120,000	Given
Profit before capital allowances	£230,000	350,000 less 120,000, with depreciation already added back
AIA on a new machining centre bought October 2026	£120,000	100% of cost, within the £1,000,000 AIA
WDA on the main pool brought forward of £90,000	£12,600	90,000 at 14%
Taxable profit	£97,400	230,000 less 132,600
Corporation tax at the main rate	£24,350	97,400 at 25%
Less marginal relief	£2,289	3/200 of (250,000 less 97,400)
Corporation tax payable	£22,061	24,350 less 2,289, an effective rate of 22.65%

Now take the machine out. Without the £120,000 AIA claim, taxable profit would be £217,400. Tax at 25% is £54,350, marginal relief is 3/200 of £32,600, which is £489, and the bill is £53,861. The machine therefore saves £31,800 of corporation tax, which is exactly 26.5% of £120,000, because both profit figures sit inside the marginal relief band. That is the number worth knowing before the order goes in, not after.

The tax is payable on 1 January 2028, nine months and one day after the period end. Fergus's company is nowhere near the £1.5 million augmented profits limit, so no quarterly instalments arise.

VAT for manufacturers

There is no manufacturing VAT scheme. You charge output VAT at 20% on standard-rated sales, reclaim input VAT on materials, machinery, power and other business purchases, and pay the difference. On the figures above, £1,400,000 of standard-rated sales carries £280,000 of output VAT; £700,000 of standard-rated purchases carries £140,000 of input VAT to reclaim; £140,000 goes to HMRC across the year's returns.

Registration is compulsory once taxable turnover exceeds £90,000 in any rolling 12 months or is expected to exceed it in the next 30 days, and the deregistration threshold is £88,000. Making Tax Digital for VAT, meaning digital records and compatible software, has applied to all VAT-registered businesses since April 2022.

Check the VAT liability of what you actually make rather than assuming it. Exports of goods are generally zero-rated but the evidence of removal is what protects the treatment. And food and drink production runs a zero-rate and standard-rate boundary that governs everything else about the business, which is why it has its own page on accounting for food and drink manufacturers.

Payroll and what a shop-floor hire really costs

The wage is not the cost. From 6 April 2025, employer national insurance contributions (NIC) run at 15% on pay above a secondary threshold of £5,000 a year. Pension auto-enrolment adds a minimum employer contribution of 3% of qualifying earnings, on a band of £6,240 to £50,270 with an earnings trigger of £10,000 (2025/26 figures, still current when this page was checked in August 2026).

So an operator on £29,500 costs the company £3,675 of employer NIC (15% of £24,500) plus £697.80 of employer pension (3% of £23,260), which is £33,872.80 before payroll software, holiday cover, employer's liability insurance and statutory sick pay exposure. The Employment Allowance of £10,500 offsets employer NIC for a business with genuine non-director staff, which most factories have, so the NIC element may be covered until the payroll grows past it.

Real Time Information filings are due on or before each payday, and late filing carries a monthly penalty scaled by headcount, starting at £100 for one to nine employees and £200 for ten to forty-nine.

If you are not a company

Plenty of small fabricators, joinery shops and specialist makers trade as sole traders or partnerships. The production issues are identical; the tax layer is different. You pay income tax on trading profit at your marginal rate plus Class 4 NIC, and profits are taxed on the tax-year basis, which has applied since 2024/25 regardless of your accounting date.

For 2025/26 the personal allowance is £12,570, the basic rate is 20% to £50,270, the higher rate is 40% to £125,140 and the additional rate is 45% above that, with Class 4 NIC at 6% between £12,570 and £50,270 and 2% above (2025/26 figures, still current when this page was checked in August 2026; Scotland sets its own non-savings bands and rates). Class 2 NIC stopped being payable from 6 April 2024 for anyone with profits at or above the Small Profits Threshold, so do not budget for a weekly charge that no longer exists.

The capital allowance position is broadly the same, with one exception that matters if you are buying heavily: the £1,000,000 AIA and the 40% first-year allowance are open to you, but full expensing is companies only. A year of large plant reinvestment is therefore one of the genuine triggers for revisiting whether the business should incorporate.

Research and development, stated carefully

For accounting periods beginning on or after 1 April 2024, research and development relief runs through the merged scheme: a Research and Development Expenditure Credit (RDEC) at 20%, with Enhanced R&D Intensive Support available to loss-making companies meeting the 30% intensity threshold. The qualifying test is an advance in science or technology with genuine technical uncertainty, resolved by a competent professional. Process improvement, new variants of an existing product and buying better equipment are not, on their own, advances. If you have genuinely solved a technical problem that your industry could not tell you how to solve, the question is worth asking properly, and our page on R&D tax credits for incremental manufacturing improvements works through where the line falls.

When you are selling the business

A manufacturing sale has its own sequence and its own tax consequences at each stage, from tidying the balance sheet and dealing with obsolete stock, through heads of terms, to the fork between selling shares and selling the trade and assets. The tax outcomes of those two routes are very different and the choice is usually made too late. Our page on selling a manufacturing business covers it.

If you want the specific numbers for your factory rather than an illustration, send us your latest accounts and your capital spend plan for the year, and we will tell you what the tax position looks like and where the costing model is guessing.