In his Budget speech in March 2023, Chancellor Jeremy Hunt announced a key new policy for companies that would be replacing the so-called super-deduction: full expensing.
“It is a corporation tax cut worth an average of £9 billion a year for every year it is in place”, Hunt said. “The Office for Budget Responsibility says it will increase business investment by 3% for every year it is in place”.
But what exactly is full expensing and how does it work?
What is full expensing?
Under full expensing, companies can claim 100% first-year relief on qualifying new main-rate plant and machinery (sole traders and regular partnerships are excluded).
In other words, companies can completely deduct the costs of new equipment like IT equipment and construction apparatus in the year they purchased it to reduce their pre-tax profits — leaving them with a smaller tax bill.
Full expensing replaces the similar 130% super-deduction that Rishi Sunak unveiled in March 2021 as Chancellor, which ended on 31 March 2023.
“If the super-deduction was allowed to end without a replacement, we would have fallen down the international league tables for tax competitiveness and damaged growth”, Hunt said during the Budget speech.
The full expensing scheme will last from 1 April 2023 until 31 March 2026, although Hunt added that he wanted to make it permanent “as soon as we can responsibly do so”.
What assets does full expensing apply to?
Full expensing only applies to certain assets, all of which must be new to qualify.
First, it only applies to ‘plant and machinery’, which is HMRC’s term for business assets that will stay in the business for a long time (aside from land, structures and buildings).
There are two types of plant and machinery, the one available to claim through full expensing being the main rate. Assets in that pool include:
- 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
- some fixtures, such as kitchen and bathroom fittings and fire alarm systems, in non-residential property.
The other type of plant and machinery is the ‘special rate pool’. Companies buying assets in this category do not qualify for full expensing, but they do for a temporary 50% first-year allowance — the assets just have to be new.
You can then claim capital allowances on the remainder of expenditure at 6% in the subsequent accounting periods.
Special rate assets include:
- parts of a building considered integral
- items with a long life
- solar panels
- thermal insulation you’ve added to a building
- cars with CO2 emissions over a certain threshold.
What happens when a company sells an asset?
When a company sells an asset on which it has claimed full expensing, it will have to bring in an immediate balancing charge equal to the value of the asset.
In other words, if a company sold an asset for £10,000 on which they had claimed full expensing, they would have to increase their taxable profits by a matching £10,000.
The same is true for special rate assets on which a company has claimed the 50% first-year allowance, though they will have to bring in a balancing charge equal to 50% of the disposal value.
Need some help with full expensing?
If full expensing sounds complex, that’s because it is, so if you need assistance with the scheme, we’re here to help.
We’ll also help you get to grips with some of the other capital allowances you might be eligible for, such as the annual investment, writing-down and first-year allowances.
The schemes are there to help you invest in equipment to better your business, and we’re here to help make sense of those schemes.
Get in touch with us to discuss capital allowances in more detail.