Chancellor announces a new tax relief for companies

Capital Allowances – A new ‘Full Expensing’ tax relief for companies

In the Spring Budget 2023, the Chancellor announced a new tax relief for companies. Effective 1 April 2023, companies can ‘fully expense’ their capital expenditure, offering 100% first-year relief on qualifying assets. The relief was originally to operate until 31 March 2026, but following an announcement in the Autumn Budget 2023, the relief will now operate indefinitely, beyond 31 March 2026, subject to future changes in legislation.

28th November 2023

While the reality is less exciting than it initially sounds, the new measure is excellent news for companies investing significantly in new plant and machinery.

It continues the Government’s ambition to boost investment and stimulate growth following the COVID-19 pandemic that began with the announcement of the super-deduction in the Spring Budget 2021.

The super-deduction

The super-deduction allowed companies investing in qualifying new plant and machinery to claim 130% first-year relief on ‘main rate’ assets and 50% on ‘special rate’ assets from 1 April 2021 until 31 March 2023.

The super-deduction quickly gained popularity as it translated into a substantial tax saving of 24.7% on eligible main pool assets compared to 19% under Annual Investment Allowance (AIA). Unlike the AIA (limited to the first £1m of expenditure, shared between group and related companies) the super-deduction had no fixed limit, making it a more appealing option in many cases.

Full expensing

Full expensing is effectively an extension of the super-deduction. The primary change from the super-deduction to full expensing is the shift in the rate of first-year relief from 130% to 100%.

This change produces an almost identical tax saving result for companies paying Corporation Tax at 25% compared to the super-deduction (£130 x 19% = £24.70 compared to £100 x 25% = £25).

There is no value cap on the amount of expenditure which can qualify. However, if you sell an asset that has benefited from the relief, any proceeds received on the sale will be immediately liable to Corporation Tax.

Rules and restrictions

To qualify for full expensing, the plant and machinery must:

  • be new and unused
  • not be a car
  • not be given to the company as a gift
  • not be for leasing

The first three points above are self-explanatory – though it should be noted that HMRC accepts that plant and machinery is unused and not second-hand even if it has undergone some limited use for the purpose of testing, delivery, or demonstration – but the final point is more nuanced.

There is a distinction between the leasing or hiring of an asset (excluded from full expensing) and the provision of services that involve the use of an asset.

Where plant or machinery is provided predominantly with an operative, it is more than a mere hire. This means such plant or machinery is not excluded from full expensing by the leasing exclusion.

The supply of plant or machinery with an operator means that the operator remains with the equipment during its use and will operate it alone.

Companies that hire equipment with an operator may do so on some occasions and not others, depending on the nature of their business and customers. When, at the time the expenditure is incurred, it is intended that the asset will predominately be provided with an operator, the precise facts of the case will need to be considered, but HMRC will generally accept that full expensing can be claimed.

Interaction with Annual Investment Allowance (AIA)

AIA will continue to run alongside full expensing, providing 100% relief for qualifying expenditure up to the current cap of £1 million. The total £1 million may not be available in some cases – e.g. a group of companies share the allowance or where the accounting period is less than 12 months.

AIA has more relaxed rules regarding what constitutes qualifying expenditure. Unlike full expensing, AIA can be claimed on second-hand equipment or assets for leasing.

Furthermore, the 100% AIA deduction applies to both ‘main rate’ and ‘special rate’ assets.

Final thoughts

While full expensing is an attention-grabbing headline, the primary benefit is to companies which will exceed their entitlement to AIA.

Given the risk of balancing charges arising from the sale of assets on which full expensing has been claimed, a claim for AIA should be made in the first instance. If the AIA entitlement is exceeded, it will be important to claim full expensing selectively on assets where no or minimal proceeds are expected from future disposals.

We also notice that HMRC are increasingly opening enquiries regarding leased assets on which the super-deduction was claimed. Therefore, companies that hire equipment with an operator must have the relevant evidence in place to prove that the super-deduction was correctly claimed.

If you would like to discuss this further contact us here…