Unveiled in the Spring Budget earlier this year, ‘full expensing’ is the highlight of what the government calls its new ‘capital allowances offer’. In this article, Nottingham chartered accountants Clayton & Brewill explains what full expensing is and how it may benefit your business.
What is full expensing?
Full expensing can be used for expenditure incurred by companies on or after 1 April 2023 and before 1 April 2026. At present, it is temporary, though the government aims to make it permanent as soon as it can.
Full expensing permits a 100% claim for capital allowances on the purchase of qualifying plant and machinery, so that the cost of investment gets written off in one go, in the year of purchase. It applies to qualifying new main rate plant and machinery. Specifically, plant and machinery must be:
- new and unused;
- not be a car;
- not be given to the company as a gift;
- or bought to lease to someone else.
For certain other types of plant and machinery, long life assets, and integral features of buildings, which don’t qualify for full expensing, a 50% first-year allowance can be claimed. This allowance comes with the same conditions as full expensing. Relief on the balance of expenditure comes in subsequent accounting periods and is given at the 6% rate of writing down allowances for special rate expenditure.
Who will benefit?
In practice, full expensing will impact only a limited number of businesses. It’s a tax relief for companies, not unincorporated businesses or partnerships. Plus, it’s a change that matters almost exclusively to companies planning capital expenditure over £1 million – the Annual Investment Allowance (AIA) limit.
However, it’s not just companies that have to get to grips with new rules on capital allowances. There’s change as well for unincorporated businesses and partnerships. For some years, the AIA limit has been set temporarily at £1 million. This has put pressure on businesses to get major capital expenditure into the window before the £1 million limit fell.
The good news is that the limit is now permanent. Most businesses should now be able to claim 100% first-year relief for expenditure on qualifying plant and machinery. It’s worth noting in passing that tax relief on the purchase of cars doesn’t come via the AIA. It’s given through writing down allowances, with rates determined by CO2 emissions and date of purchase. Enhanced capital allowances are available for new and unused electric cars.
When you time capital sales and purchases can be critical, so for the optimal tax outcome, we always recommend advance preparation.