Full expensing relief – the new capital allowance

Full expensing replaces the super-deduction which expired on 31 March 2023, and provides tax relief of 100% for new and unused plant and machinery acquired between 1 April 2023 and 1 April 2026.

UPDATE 22 NOV 2023: Autumn Statement makes Full Expensing permanent.

The super-deduction provided tax relief of 130% for new and unused plant and machinery acquired between 1 April 2021 and 31 March 2023. 

Even though this is a higher rate of tax relief than full expensing, the cash value of the super-deduction is actually approximately the same as full expensing relief at 25p per £1 of investment, due to the recent increase in the corporation tax rate to 25%.

What is full expensing?

Companies incurring qualifying capital expenditure between 1 April 2023 and 1 April 2026 will be able to claim a 100% first-year allowance for new and unused ‘main rate’ capital expenditure. 

Broadly, this includes most plant and machinery, furniture and other equipment.

In addition, a 50% first-year allowance is available for new and unused ‘special rate expenditure’. This includes such things as air conditioning systems, heating systems, electrical works, lighting, lifts and long-life assets.

A company must claim these reliefs in the year the expenditure is incurred – it is not possible to carry forward the expenditure and make a claim in a later period. 

Who is eligible?

Companies can claim full expensing

However, full expensing and the 50% FYA are not available for partnerships, LLPs or unincorporated businesses. 

These businesses are however, still entitled to claim the Annual Investment Allowance (AIA) which also offers 100% tax relief for expenditure on qualifying capital assets up to £1 million per year.

What expenditure qualifies?

Full expensing is available for the acquisition of plant and machinery that is new and unused. It excludes cars (but not vans and lorries) and assets acquired for leasing. 

There is however, a separate provision giving 100% first-year allowances in respect of electric cars until 31 March 2025.

The 50% first year allowance is available for the acquisition of new and unused special rate pool items including integral features (e.g. electrical systems, cold or water heating systems, lifts), long life assets, thermal insulation of commercial buildings and solar panels. Once again, cars are excluded. 

There are special rules relating to assets acquired under hire purchase. Generally, these assets are treated as belonging to the business using them, even though legal ownership may not pass until a final payment is made at the end of the contract term. 

Interaction with the Annual Investment Allowance

The Annual Investment Allowance (AIA) allows businesses to claim tax relief of 100% for the cost of plant and machinery up to £1m in the year it is incurred. 

Unlike full expensing, AIA is not restricted to new and unused plant and machinery but can be claimed on second hand equipment. AIA can also be claimed by partnerships and other unincorporated businesses. 

AIA can additionally be claimed on special rate expenditure, so for many companies the AIA will provide a more valuable alternative to the 50% first year allowance.

For others, who may anticipate selling plant and machinery assets for value at a later date, claiming AIA will avoid the balancing charges provisions discussed below.

Where there are many companies within a group or under common control, the AIA needs to be shared between those companies. The new 100% FYA and 50% FYA do not have similar rules, so this is likely to be of benefit to larger groups. 

Companies have the choice of whether to claim 100% FYA, 50% FYA or AIA, so with careful planning they can utilise these reliefs to maximise their tax savings.

What happens if I sell the assets?

When a company sells an asset on which it has claimed full expensing or 50% FYA, a ‘balancing charge’ will arise, calculated based on the disposal proceeds.  

Example

A company incurs qualifying expenditure of £1m on plant and machinery and claimed full expensing on £750k and AIA on the balance of £250k. 

At a later date it sells the same asset for £100k. The balancing charge will be £75k ((£750k/£1m) x £100k). The balancing charge and the remaining proceeds of £25k will be deducted from the capital allowances pool to which the assets belonged.

Where a company sells an asset on which it has claimed 50% FYA, the rule is the same except that the amount on which 50% FYA was claimed is divided by 2 when calculating the balancing charge. 

Conclusion

The recent introduction of Full Expensing has added to the arsenal of tax reliefs available for those incurring capital expenditure and looking to mitigate the effects of the new rate of corporation tax. The precise mix of claims needs to be carefully considered as part of an overall tax planning exercise.

Further information

If you would like to know more about full expensing and other forms of capital allowances, or if you are contemplating a major capital outlay, please contact a member of our Business Tax team