In today's Autumn Statement, the Chancellor has decided to make his flagship ‘full expensing’ policy permanent so as to give companies subject to UK corporation tax certainty and reward for ongoing investments in qualifying plant or machinery – potentially returning up to 25p for every £1 in the chargeable period expenditure is incurred.
Despite the recent rise in corporation tax rates (up to 25%) from 1 April 2023, the government’s historical approach has been to favour lower corporate tax rates and less capital tax incentives, leaving all companies on the same level playing field to decide for themselves what to invest.
The trouble with this approach is that it makes little distinction for capital intensive businesses like manufacturing who need to replace and upgrade plant and equipment much more quickly than other trades to compete.
The Annual Investment Allowance (AIA), which is also available to partnerships and individuals, is a great incentive for SMEs but with a £1 million annual cap it can quickly run out for major investments leaving companies to write-off the balance over many years depending on which ‘pool’ classification the qualifying plant and machinery sits, ‘main rate’ (18%) or ‘special rate’ (6%).
There is planning like ‘short-life asset elections’ to write-off the balance of many ‘main rate’ pool assets if they are replaced or sold within eight years but not all ‘main rate’ pool assets qualify and when they do there is separate reporting and administration requirements which often puts businesses off.
How it works
Full expensing allows companies to deduct 100% of the cost of its new and unused 'main rate' pool plant or machinery in Year 1 instead of relying on its £1 million 'Annual Investment Allowance' which was made permanent in last year's 'mini budget' or the standard 18% writing down allowance.
This means a company with a corporate tax ('CT') bill of £500,000 (arising say from profits subject to tax of £2 million at a CT rate of 25%) with qualifying expenditure of £2 million could reduce that tax liability to nil.
Examples of plant and machinery that may qualify for full expensing includes (but is not limited to): machines such as computers, printers, lathes and planers, office equipment such as desks and chairs, vehicles such as vans, lorries and tractors (but not cars), warehousing equipment such as forklift trucks, pallet trucks, shelving and stackers, tools such as ladders and drills, construction equipment such as excavators, compactors, and bulldozers; and, some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property.
Special rate first year allowance
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 WDAs for special rate expenditure.
Examples of 'special rate' pool assets include (but is not limited to): an electrical system (including a lighting system), a cold-water system, a space or water heating system, a powered system of ventilation, air cooling or air purification (including any floor or ceiling comprised in such a system), a lift, an escalator or a moving walkway, external solar shading; and, solar panels.
Full Expensing Restrictions
Full expensing is only available for expenditure on plant and machinery (expenditure on buildings, structures and land will not normally be eligible). There are also some notable exclusions, such as cars, as well as many assets used for leasing.
The current leasing exclusion is limited to businesses who lease qualifying assets as part of their trade (e.g., software acquired for licensing or sub-licensing) but not 'background plant and machinery' similar to the previous Super Deductions so property landlords should expect to benefit for most assets installed or fixed in leased properties [see Note 2]
The expenditure must be incurred by a company (including corporate partners in partnership) within the charge to corporation tax
The assets must be new and unused (companies buying from developers with pre-let buildings should take extra care to avoid falling foul of the unused restriction).
Full expensing is a first-year allowance which means a claim must be made in the period in which expenditure is ‘incurred’ (the Capital Allowances Act 'CAA' 2001 determines 'timing' which can differ from accounting treatment and any businesses in doubt should seek advice). Companies that claim allowances once projects are complete, or every few years, may wish to adjust their capital allowances processes to benefit from this relief.
Assets acquired from connected parties are normally excluded and therefore intra-group procurement arrangements should be reviewed accordingly.
What happens when a company sells an asset?
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 £100,000 on which they had claimed full expensing, they would be required to increase their taxable profits by £100,000.
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 £100,000, they would be required to increase their taxable profits by £50,000 with the remaining £50,000 being deducted from the 'special rate' pool.
It is worth noting that 'fixtures' elections (CAA 2001 s198) are still available for plant and machinery assets where a first-year allowance like full expensing has been claimed.
How can we help?
Bryan is a qualified surveyor (MRICS) and tax practitioner (ATT - Fellow) who is used to working with accountants, finance and tax teams throughout the UK to help them comply and benefit from capital allowances (including the complexities of full expensing and related reliefs) and can be contacted at firstname.lastname@example.org.
The government has announced plans for a technical consultation from January 2024 aimed at simplifying, condensing or reducing broader capital allowances legislation to make claims for full expensing easier.
HM Treasury is currently exploring solutions designed to support the leasing sector accessing full expensing.
Bryan will be involved in both (1) and (2) and if you would like more detail, please get in touch.