Starting from April 2023 until March 2026, businesses have the opportunity to receive 100% capital allowances on qualifying investments made in plant and machinery. This policy, known as full expensing, allows companies to fully deduct the cost of their investment in one go. Essentially, for every pound a company invests, they can get up to 25p in tax cuts. This measure is designed to make the UK's capital allowances system among the best in the world.
The government hopes full expensing will encourage investment and productivity growth. Business investment has been a weakness in the UK, with only 10.0% of GDP accounted for in 2021 compared to the OECD average of 12.5%. By offering a competitive Corporation Tax rate and generous investment incentives, the government hopes to reward businesses that invest and create sustained economic growth.
To further encourage investment, the government introduced the super-deduction in 2021, to encourage companies to make additional investments and bring planned investments forward as the UK recovered from the pandemic.
Full expensing is an extension of the super-deduction and allows companies to write off 100% of the cost of investment in one go. It is an attempt to simplify the capital allowances regime and makes it more generous.
Surveyed businesses showed a clear preference for full expensing last year when they were quizzed on capital allowances.
Capital allowances refer to a form of tax relief that businesses can receive. Essentially, they allow businesses to deduct some or all of the cost of an item from their profits before paying tax. There are different types of capital allowances available, including the Annual Investment Allowance (AIA), Writing Down Allowances (WDAs), First-Year Allowances (FYAs), and Structures and Buildings Allowances (SBAs).
The AIA permits businesses to claim 100% of the cost of plant and machinery up to £1m in the year it is incurred. WDAs, on the other hand, spread the tax deductions over time at a rate of 18% and 6% per year for main rate and special rate expenditure respectively. FYAs allow a company to claim a percentage of the cost of plant and machinery investments in the year it is incurred. Lastly, SBAs permit a business to deduct 3% per year over 33 1/3 years for qualifying expenditure on non-residential structures and buildings.
Capital allowances can be a valuable tool for businesses to reduce their tax liability and improve their financial situation.
So, how does full expensing differ?
Full expensing is a tax deduction that allows companies to claim back 100% of their qualifying expenditure in the year that the expenditure is incurred. This deduction can only be claimed by companies that are subject to Corporation Tax. It is important to note that this deduction only applies to the provision of "main rate" plant or machinery that is new and unused. Assets such as cars or those given to the company as a gift are not eligible for this deduction.
This deduction is available for expenditure that is incurred on or after 1 April 2023 but before 1 April 2026. For unincorporated businesses, they cannot claim full expensing but can claim the AIA (Annual Investment Allowance) which offers similar benefits for investments up to £1 million per year.
If a company's expenditure is on "special rate" assets that do not qualify for full expensing, they can claim a 50% first-year allowance instead. This means they 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 still be claimed on the remaining expenditure in subsequent accounting periods at a rate of 6% for special rate expenditure.
What kinds of purchases are covered by full expensing?
Full expensing is for Plant and machinery so any physical assets, excluding land, buildings and structures, that are used in the day-to-day operations of a business. These assets can be claimed as capital allowances. Examples of plant and machinery that may qualify for full expensing include computers, printers, vehicles (excluding cars), shelving, forklift trucks, tools and construction equipment. Additionally, some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential properties may also qualify.
What happens when something that was 'fully expensed' is sold?
When a company sells an asset, there are specific rules that apply, especially if the company has claimed full expensing or the 50% first-year allowance. If a company has claimed full expensing, they will have to pay an immediate balancing charge that is equal to 100% of the selling price.
For example, if a company sold an asset for £10,000, they would need to increase their taxable profits by £10,000. On the other hand, if a company has claimed the 50% first-year allowance, they will need to pay a balancing charge that is equal to 50% of the selling price. The remaining balance of 50% will be deducted from the special rate pool balance.
For instance, if a company sold an asset for £10,000 and had claimed the 50% first-year allowance, they would need to increase their taxable profits by £5,000, and the remaining £5,000 would be deducted from the pool.
Another example is given by HMRC as a business spending a significant amount of money on a modern production line, which includes £10 million on different pieces of machinery. The company also invests £2 million in a new electrical system, which is considered a special expense. The business can claim £10 million as an expense and £1 million as a first-year allowance, which is 50% of the total expense. The remaining balance of £1 million can be added to the special expense pool in the future.
Full expensing is a tax benefit that is only available to companies that are subject to Corporation Tax. Unfortunately, unincorporated businesses are not eligible for this benefit. However, these businesses can still claim the Annual Investment Allowance (AIA) that now provides 100% first-year relief for plant and machinery investments up to £1 million. This allowance is available for all businesses, including unincorporated businesses and most partnerships.