Chancellor announces Full Expensing

Announcement

On Wednesday 15 March 2023, we awaited with anticipation to understand the Chancellor’s fiscal plans following a turbulent year that has seen inflationary pressures and a merry-go-round of political leaders and appointments. For E³ Consulting, a key aspect of this was the not-so secret plans for life after the 130% Super-deduction, introduced as a measure, by the now Prime Minister Rishi Sunak, to encourage businesses to continue investing in plant and machinery assets and not withhold expenditure until the 25% Corporation Tax (CT) increase came into effect (and corresponding Special Rate (SR) Allowance for integral feature/long life asset qualifying expenditure).

It was unlikely that we were ever going to see an extension of the Super-deduction, as the 30% ‘uplift’ in tax relief specifically bridged the gap in CT amounts (19% to 25%), hence an extension would have ‘doubled down’ on the relief now that the main rate of CT will be set at 25% - as reintroduced by the Autumn Statement in November 2022 and confirmed by this Spring Budget. However, what has been introduced as the successor to the Super-deduction is what many have been calling for in the industry for a while now, Full Expensing (FE). A chance for capital allowances to be simplified, whilst not increasing the amount of tax relief on offer but changing the way in which the allowances are claimed, a significant cash flow advantage.

Detail

Full Expensing is a 100% first-year allowance (FYA), allowing companies (subject to CT) to claim the deduction from taxable profits of 100% of their main pool plant and machinery qualifying expenditure in the year expenditure is incurred, rather than the ‘normal’ writing down allowances (WDAs) of 18% per annum on a reducing balance basis – thus accelerating the tax relief and delivering a clear cash flow advantage.

Currently, the expenditure must be incurred in the three-year period of 01 April 2023 to 31 March 2026, inclusive. However, the Chancellor did note in his speech that the aim is to have Full Expensing made permanent beyond this initial three-year window, though this is entirely based upon it being “economically responsible” to do so. As with the Super-deduction, Full Expensing will only be available on plant and machinery which is unused and not second-hand.

As you would expect, there are also some anti-avoidance measures including expenditure incurred under “disqualifying arrangements” and a “special balancing charge” for those assets where Full Expensing is utilised. The expenditure must not be excluded by the general exclusions for first-year qualifying expenditure at s.46 Capital Allowances Act 2001 – though there is a caveat allowing background plant and machinery to qualify i.e. investment landlords. The Government seemingly having learned their lesson after intense lobbying on the Super-deduction resulted in a legislative amendment where it was initially barred against landlord expenditure by the general exclusion.

Like the Super-deduction regime, there will be a 50% FYA for plant and machinery assets qualifying for the special-rate pool; integral features such as heating, ventilation and air conditioning (HVAC) and electrical systems, and long-life assets.

Commentary

With the Annual Investment Allowance (AIA) now permanently set at the first £1,000,000 of qualifying expenditure, Full Expensing will really only affect the heaviest capital investors across the country – a measure that the Government hopes will both drive domestic investment and make the UK more attractive to new investment from overseas. It is expected that 99% of UK businesses will have their investments completely recovered within the AIA cap in the year of expenditure, without the need for Full Expensing.

Full Expensing (and 50% FYA) is only available for incorporated businesses subject to CT and will therefore be unavailable to many businesses operating as sole traders or individuals within partnerships, subject to Income Tax. These businesses will have to rely on their AIAs to write off expenditure in the year incurred. Special attention needs to be paid to the entity structure however, as those individual members of partnerships that also include corporate entities, continue to face restrictions on claiming AIAs also, and therefore without Full Expensing or AIAs, reverting back to the default (and slower) WDAs.

Alun Oliver – “We have heard many politicians talk of tax simplification over the years, only to follow up with different and new forms of capital allowances, with various writing down allowances, first year allowances and complex clawback or avoidances regimes - in short often making property taxation considerably more complicated, especially for smaller businesses. Full Expensing is a welcome change that will ultimately simplify capital allowances across the board, for all incorporated businesses, for at least the next three years. Unfortunately, we have again seen disregard to many businesses (the backbone of the UK economy) operating traditionally outside of incorporated structures, such as farming businesses, dental and doctor’s practices, professional services firms and the like, all of whom will not be able to claim this first-year allowance at all.”

Next Steps

If you would like to discuss Full Expensing or any other capital allowances issues, then please do contact the team on 0345 230 6450 or hello@e3consulting.co.uk with any queries or for assistance. We look forward to speaking with you soon.