What is ‘Full Capital Expensing’ and how could it support your investment plans

A new “Full Capital Expensing” policy is in place from 1st April 2023 to 31st March 2026. Here's what business leaders need to know.

To offset the rise in corporation tax, coinciding with the end of the generous super-deduction scheme on 31st March 2023 (which gave enhanced 130% relief for new qualifying plant and machinery acquired by companies), in his Spring Budget 2023, the Chancellor introduced a new “Full Capital Expensing” policy which will be in place from 1st April 2023 to 31st March 2026.

Full Capital Expensing (effectively 100% tax relief, called a ‘First Year Allowance’), enables businesses to deduct the cost of any eligible investment from their corporation tax bills in one go, rather than over several years. The full list of eligible investment can be found here on the Government’s website.

The hope is that this policy will make it more attractive for companies to invest in new plant and machinery.

In the Spring Budget 2023, the government announced:

  • Full expensing – which offers 100% first-year relief to companies on qualifying new main rate plant and machinery investments from 1 April 2023 until 31 March 2026
  • A 50% first-year allowance (FYA) for expenditure by companies on new special rate (including long life) assets until 31 March 2026

Up to now, businesses could only deduct a small fraction of the cost of an investment each year over the accounting lifespan of the investment. In reality, this meant that businesses wouldn’t get the full cost of the investment, because inflation eroded the value of the money firms could claim back in future years. So, the longer the right off time, the less of the cost of the investment that could be written off.

Now, businesses will be able to deduct the cost of any eligible investment from their corporation tax bills straight away.

Similar to the super-deduction, Full Capital Expensing also results in a 25p tax saving for every £1 a company invests (19% x 130% super-deduction rate = 25%).

The Office for Budget Responsibility (OBR) argues that because this policy is initially only for 3 years, it provides a strong incentive for businesses to bring forward investment that had been planned.

For “special rate” expenditure, which doesn’t qualify for full expensing, a 50% first-year allowance can be claimed instead, subject to the same conditions that apply for full expensing. This means that a company can claim a deduction from taxable profits that is equal to 50% of their qualifying expenditure in the year that expenditure is incurred.

Please note that full capital expensing is only available to companies who pay Corporation Tax. Unincorporated businesses cannot claim, but they are entitled to claim the Annual Investment Allowance which offers the same benefits as full expensing for the investments it covers. The Annual Investment Allowance is now permanently set at £1million.

Subsequent disposals of assets on which one of these ‘First Year Allowances’ has been claimed will trigger a clawback of tax relief at a rate of 100% or 50% of the disposal proceeds, depending on the rate of the original relief.

These new FYAs will mainly be of interest to companies that have already fully used their £1million Annual Investment Allowance.

If you’d like more information about Full Capital Expensing or help with your investment plans, please contact us today on 0161 249 5040 or email partners@leonherman.co.uk.

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