What is “Full Expensing”?

The March 2021 Budget introduced the “Super Deduction” which was an enhanced capital allowance for qualifying expenditure on plant and machinery incurred by companies from 1 April 2021 to 31 March 2023.

Companies are still able to claim the super deduction on expenditure incurred up until 31st March 2023. It provides the following:

• an enhanced allowance of 130% on investment in new plant and machinery which would ordinarily qualify for an 18% writing down allowance;
• an allowance of 50% on new plant and machinery expenditure which would ordinarily qualify for only a 6% writing down allowance in the special rate pool (e.g. expenditure on integral plant in buildings).

At the 2023 Spring Budget, the Chancellor replaced the super-deduction with an unlimited 100% first-year allowance for qualifying new plant and machinery investment by companies, for the three years from 1 April 2023 to 31 March 2026. He called this “full expensing.” The chancellor also stated his intention to make this relief permanent as soon as it is prudent to do so.

For “special rate” plant and machinery there will be a 50% first-year allowance between 1 April 2023 to 31 March 2026.

Mitigating the rise of Corporation Tax

Full expensing has been brought in to help mitigate the rise of corporation tax from 19% to 25% from April 2023, with no upper limit on how much can be claimed. Because full expensing allows businesses to claim 100% of their investment for the year in which it takes place, the hope is that it will promote investment and stimulate economic growth.

Under full expensing, companies are able to immediately deduct the full cost of investment in new machinery, equipment, or other assets from their taxable profits, instead of having to depreciate the expenditure over a number of years. This will allow companies to reduce their tax liability in the short term, making investment more attractive and, potentially, increasing the amount of capital available for investment.

For “special rate” expenditure, which does not qualify for full expensing, a 50% first-year allowance can be claimed instead, subject to the same conditions that apply for full expensing. Meaning 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.

The balance of the special rate expenditure remaining after the 50% FYA allowance can be written down at the 6% special rate expenditure in subsequent accounting periods.

Full expensing is only available for limited companies. Unincorporated businesses investing in plant and machinery do not qualify. However, unincorporated businesses can still claim the Annual Investment Allowance which gives them a 100% deduction on qualifying expenditure up to £1 million.

What are the benefits of “Full Expensing”?

• Full expensing is intended to incentivise companies to invest in new equipment and technology by reducing the upfront cost of investment. Such an incentive is designed to lead to increased investment and promote economic growth.
• Investing in new equipment and technology will enable companies to increase their productivity and efficiency, leading to higher output and increased competitiveness.
• Full expensing is designed to encourage innovation by providing companies with the financial resources to invest in new ideas and technologies; Leading to the development of new products and services and potentially creating new markets and economic opportunities.

Full expensing is designed to reduce the tax burden on companies, by freeing up financial resources for reinvestment.

Whilst full expensing will be attractive to larger companies, the jury is out as to what benefit it will provide for small and medium-sized companies

For detailed advice and guidance on Full Expensing, please contact David Gillies at Friend Partnership.

You can call David on 0121 633 2007 or contact him by email at david.gillies@friendllp.com