As expected, the annual investment allowance is to increase to £1 million from 1/6 April 2023. This is available for most expenditure, including special rate expenditure such as integral features. Certain assets, most notably cars, are excluded.
Full expensing
The Chancellor has also announced “full expensing” for an initial period of three years, but with the intention of making this permanent. This is for companies only, and the way it will work is explained in the official documentation as follows:
- “This lets taxpayers deduct 100% of the cost of certain plant and machinery from their profits before tax. It is effective from 1 April 2023 to 31 March 2026.
- It applies to spending on main rate equipment, which includes but is not limited to, warehousing equipment such as forklift trucks, tools such as ladders and drills, construction equipment such as bulldozers and excavators, machines such as computers and printers, vehicles such as tractors, lorries and vans, office equipment such as chairs and desks, and some fixtures such as kitchen and bathroom fittings and fire alarm systems.
- FE means that companies can deduct 100% of the cost from their profits straight away – rather than more slowly over the life of the asset.
- Similar to the super-deduction, FE also results in a 25p tax saving for every £1 invested (19% x 130% super-deduction rate = 25%).
- Before the super-deduction and with the 19% Corporation Tax rate, companies investing £10m in main rate assets received a £342,000 tax saving in year 1. Under full expensing, on a £10m investment, a company will receive a £2.5 million tax saving in year 1.
- As part of his commitment to maintain a stable economy, the Chancellor’s long-term ambition is to make full expensing permanent.”
The Budget documentation also explains the full expensing in the following terms:
“From 1 April 2023 until 31 March 2026 investments made by companies in qualifying plant and machinery will qualify for a 100% first-year allowance for main rate assets. This means companies across the UK will be able to write off the full cost in the year of investment, known as full expensing. Companies investing in special rate (including long life) assets will also benefit from a 50% first-year allowance in the year of investment. Expenditure on plant or machinery for leasing is excluded from first -year capital allowances due to longstanding concerns about abuse and wide scope for error. The government will work with industry to identify possible policy solutions that appropriately mitigate these risks.”
Claritax analysis
Full expensing is not as big a development as it may first have appeared. In particular:
- It is for limited companies only.
- It does not apply for special rate expenditure (though a 50% allowance is potentially available for this).
- It does not apply for used items, including fixtures in properties that are bought from another party.
- Disposals will give rise to immediate balancing adjustments (almost certainly a balancing charge).
https://www.gov.uk/government/publications/full-expensing
Related content from Claritax Books
Capital Allowances, by Ray Chidell and Jake Iles, offers in-depth coverage of plant and machinery allowances, structures and buildings allowances, and all other UK capital allowances.
Full reference is made throughout to legislation, case law and HMRC guidance.
