In the Spring Budget the Chancellor announced full expensing to replace the previous scheme, the super deduction, from 1 April 2023. Full expensing is a 100% relief for new, eligible plant and machinery, essentially reducing its in-year cost by 25%.
Businesses that invest in IT equipment and machinery will be able to claim back the cost by writing it off against tax on their profits and will be available for expenditure incurred up to 31 March 2026. This is in addition to the £1 million annual investment allowance (AIA).
What is full expensing?
You can claim full expensing if your business incurs capital expenditure on most loose plant and machinery, furnishings, manufacturing equipment and software, as long as it qualifies for the main pool (unlike with AIA).
The items purchased are not pooled with other equipment. Therefore, separate records must be kept for each piece of equipment, due to a clawback charge based on the disposal value of the asset.
A clawback charge applies when an asset purchased with a first-year allowance is disposed of. The disposal value (proceeds received) is brought in as a balancing charge (taxable amount) in the time of disposal. This is different to pooled expenditure, where proceeds are generally introduced into the relevant capital allowances pool and are often not fully taxed during the disposal period.
Practically, how do these allowances work?
Where the company’s year-end straddles 31 March 2023, the amount of super-deduction is pro-rated. For example, if the company had a year-end of 30 September 2023, and incurred expenditure on a new machine before 31 March 2023, there would be 115% relief for that equipment. A new lorry purchased in May 2023 would only qualify for 100% full expensing.
Where a company buys new equipment that would normally be dealt with in the capital allowances special rate pool, such as the installation of air conditioning or central heating, the 50% first year allowance (FYA) continues to apply until 31 March 2026. The balance of expenditure would then be dealt with in the special rate pool with a 6% writing down allowance per annum on a reducing balance basis. Where the £1 million AIA is available it would be more advantageous to claim AIA at 100%, rather than the 50% FYA.
Businesses should be aware that…
- Full expensing is only available for expenditure on plant and machinery. Spending on land, buildings and structures is not generally eligible. Other notable exclusions include cars and assets for leasing.
- The assets must be new and unused. Some exceptions may be made, but these are irregular.
- The expenditure must be incurred by a company, or claimed by a corporate partner in a partnership, within the charge to Corporation Tax.
- Full expensing is a first-year allowance and consequently, the claim must be made in the period in which expenditure is incurred. This is a specific requirement to capital allowances. If you tend to claim allowances every few years, or when projects have been completed, you may need to amend your capital allowance processes for the full expensing relief.
- Acquiring assets from connected parties are excluded.
Some considerations
Full expensing offers a valuable solution to companies, who have plans to incur very high levels of capital expenditure. Care does need to be taken when considering this when looking at the set off of losses produced.
Should your company be undertaking a project over a number of years, it will be worth identifying the timing of expenditure so that the first-year allowance can be utilised.
If you require any guidance on how full expensing could work for your business, please get in touch with a member of the Burton Sweet team who will be happy to offer their guidance.
Please also check our guide to tax rates and allowances for 2023/24, for more details on other available allowances and keep a look out for our regular blog articles, which share similar insight.
Need some guidance?
If you would like to discuss any of the topics covered above and how they may affect you, then please contact us and one of our team will be happy to have a conversation.
