Spring Budget 2023 – Companies to fully expense capital expenditure

The Spring Budget 2021 introduced new temporary capital allowances for companies (the Super-Deduction) to boost investment and growth post-Covid. These are set to end on 31 March 2023. The Super-Deduction allows companies to claim 130% capital allowances on main pool plant and machinery and 50% for capital expenditure which falls into the special rate pool, subject to certain exclusions.

The Super-Deduction became widely popular as the 30% uplift translates into an additional tax saving of 5.7% on eligible main pool assets, compared to the tax relief companies are entitled to under the established Annual Investment Allowance (AIA). Furthermore, in contrast to AIA, the temporary Super- Deduction allowances are unlimited.

The full capital expensing (FCE) announced in the Spring Budget 2023, is for all intents and purposes, an extension of the existing Super-Deduction regime until 31 March 2026.

The only apparent change is that from 1 April 2023, the rate of relief for the plant and machinery will be given at 100% rather than 130%. This will produce an almost identical result for companies paying their Corporation Tax at 25% (£130 x 19% = £24.70 compared to £100 x 25% = £25.00). As far as the initial details released go, the special rate pool 50% first year allowance will carry on unchanged.

Similar rules will govern the type of expenditure that will qualify. Broadly speaking, expenditure will qualify if an asset is new, it is not going to be leased out and it is not a car. Concession will be available for landlords so that qualifying expenditure on fixtures and other qualifying assets on let property will not be caught by the exclusion of leased assets.

There is no limit to the amount of expenditure that can qualify, unlike AIA. However, if you sell an asset that has benefitted from the relief, any proceeds received on sale will be liable to Corporation Tax straight away, rather than the charge being spread over a number of years.

AIA has been in place since April 2008 and will continue to run alongside the new FCE regime. In contrast to FCE, AIA is subject to an annual cap. The AIA cap has been set at varying levels over the years ranging from £50,000 to the current £1m. It is the Government’s intention that the £1m AIA cap will be retained for the foreseeable future. The full annual AIA cap may not be available in some instances – e.g. where there is a group of companies or where there is an accounting period of less than 12 months.

The AIA has more relaxed rules as to what constitutes qualifying expenditure. Unlike FCE, there is no restriction on second-hand or leased assets. Furthermore, the 100% AIA deduction applies to both the main pool and special rate pool assets.

Unlike FCE, assets that have attracted AIAs and which are subsequently sold, do not automatically have their proceeds subject to Corporation Tax straight away, although this will be the case if there is no pool of unrelieved qualifying capital expenditure.

Whilst a headline grabber, the new FCE regime will only be of real benefit to those companies that exceed their entitlement to AIA. The FCE may be of use in the event that the £1million AIA allowance is exhausted.

Because of the risk of balancing charges arising, given a choice between claiming the FCE or the AIA, we would advise that a claim for AIA is made in the first instance. If the AIA entitlement is exceeded, then FCE should be claimed selectively on assets where no or minimal proceeds are expected from future disposal.

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