Full Expensing

October 2023

 

Background

Depreciation of fixed assets charged in the accounts is not allowable in computing taxable profits. Instead, the UK government introduced capital allowances which is a form of tax relief that allows businesses which pay tax in the UK to deduct from their taxable profit (before calculating their tax liability), the value of their qualifying capital expenditure on assets such as equipment or buildings.

Back in March 2022, The Prime Minister, The RT Hon Rishi Sunak MP, back in March 222 when he was The Chancellor of the Exchequer hinted on a number of reforms to better support business investment in the UK. This is against the backdrop of the fact that when compared with other countries, the tax treatment allowable in the UK for capital assets such as those qualifying as plant and machinery, is much less generous that the OECD average.

One of those reforms hinted back in 2022, is the “Full Expensing”, which has now been introduced for a 3-year period by the current Chancellor, Jeremy Hunt during his Spring Budget 2023 statement.

What is Full Expensing?

Full expensing is a 100% first-year allowance which allows companies to claim a deduction from taxable profits that is equal to 100% of their qualifying main pool plant and machinery expenditure in the year that expenditure is incurred.

In modern British history, this is considered very generous and simplified. For instance, this means that when a company spends £10m in acquiring any piece of plant or apparatus for carrying on their business activity for example, they will be entitled to deduct the £10m immediately in full from their taxable profit in that year. Assuming a 25% Corporation Tax rate, the immediate tax cash saving benefit would equate to £2.5m. This is far more generous than the immediate tax benefit expected in the default tax relief schemes, excluding the temporary 130% super-deduction which ended April 2023.

The super-deduction scheme is a form of capital allowances tax relief. The super-deduction scheme introduced in Finance Bill 2021 to amend Part 2 Capital Allowances Act 2001, is a two-year temporary first year allowances (FYA) for certain qualifying capital assets in the form of plant and machinery. The scheme was announced on 03 March 2021 and is only available to businesses within the charge to corporation tax. It is however, no longer available for expenditure incurred after the end of March 2023.

 

How does it work?

Expenditure must be incurred on the provision of “main rate” plant or machinery on or after 1 April 2023 but before 1 April 2026.

Full expensing is available to companies subject to Corporation Tax only. Therefore, unincorporated businesses cannot claim, but such businesses are entitled to claim the Annual Investment Allowances (AIA) which offers the same benefits as full expensing for the investments it covers (but restricted to £1 million per year).

The plant and machinery must be new and unused, must not be a car, given to the company as a gift, or bought to lease to someone else.

Expenditure on second-hand assets and those bought to lease to someone else can still qualify for the AIA.

For “special rate” expenditure, which doesn’t qualify for full expensing, a 50% first-year allowance can be claimed instead, subject to the same conditions that apply for full expensing. This means that a company can claim a deduction from taxable profits that is equal to 50% of their qualifying expenditure in the year that expenditure is incurred. Capital allowances can be claimed on the balance of expenditure in subsequent accounting periods at the 6% rate of Writing Down Allowances (WDA) for special rate expenditure.

If a company sells an asset on which it has claimed either full expensing or the 50% first-year allowance, there are special disposal rules which apply.

For the disposal of an asset on which a company has claimed full expensing, the company will be required to bring in an immediate balancing charge equal to 100% of the disposal value. This means that if the company sold an asset for £10,000 on which they had claimed full expensing, they would be required to increase their taxable profits by £10,000.

For the disposal of an asset on which a company has claimed the 50% first-year allowance, the company will be required to bring in a balancing charge equal to 50% of the disposal value. The remaining balance of 50% is treated in the normal way so is deducted from the special rate pool balance. This means that if the company sold an asset on which they had claimed the 50% first-year allowance for £10,000, they would be required to increase their taxable profits by £5,000 with the remaining £5,000 being deducted from the pool.

 

Summary

This full expensing therefore would appear to be a very simplified system that most businesses are excited about from experience. One of the criticisms from businesses about the UK capital allowances system is the complexity of it. Full expensing is therefore very popular amongst taxpayers.

It is, however, important to note the cost implication of the full expensing to the Treasury. Currently, and just like the UK, no G7 government has implemented a full expensing model on a permanent basis. Presumably, the expected huge cost implication has played a major part in this. With an estimate of £11 billion cost to the Treasury in a single year at its peak, full expensing is expensive and therefore appears to be more suited as a temporary measure.

Next Steps

Capital allowances is a vast topic and there are various forms, types and categories. Capital allowances can be claimed not only by companies, but also partnerships, individuals and overseas investors which carry out qualifying business activities such as a trade, property business, furnished holiday let, etc.

Are you planning to, or have you already incurred any commercial building or large-scale industrial and engineering plant related capital expenditure which may fall under any of the following categories?

• New construction
• Refurbishment works
• Fit out works
• Buying buildings

Please let us know as we can help you maximise your capital allowances tax cash savings and Boost Your Impact.