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Full expensing capital allowances and the end of the super-deduction

Director - Capital Allowances
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Despite challenging economic conditions, the government ended super-deduction capital allowances on 31 March 2023. Introduced to soften the impact of the rise in Corporation Tax to 25%, the much-lauded incentive allowed many businesses to invest in plant, machinery and other assets. Understandably there was considerable industry pressure for the government to extend the scheme as businesses continue to grapple with major challenges.

We examine the Chancellor’s Spring Budget announcement and take a look at the introduction of full expensing capital allowances.

Capital allowances and super-deduction

When introduced in April 2021, the super-deduction was one of the biggest tax reductions in modern memory. Behind the headline-grabbing 130% rate of relief was a desire to supercharge UK productivity as the economy emerged from the pandemic. It was intended to encourage companies to invest in plant and machinery that would help them grow – and to make those investments immediately rather than deferring them to some future date.

For the two years in which it applied, the super-deduction offered companies relief at 130% on qualifying plant and machinery investments, and a 50% first-year allowance for qualifying special rate assets.

This enabled companies to cut their tax bills by up to 25p for every £1 invested, making the UK one of the most competitive capital allowances regimes in the world. However, it was always intended to be time-limited, leading to speculation as to what would follow.

What comes next: the introduction of full expensing

While the Chancellor didn’t extend the super deduction scheme in his 2023 Spring Budget, he did announce full expensing.

Full expensing is a capital allowance which provides 100% first year allowance on qualifying expenditure. In effect, this means that companies receive a 25% tax deduction for the capital expenditure on most plant and machinery.

The full expensing capital allowance is currently due to be in operation for the next three years, available up to the end of March 2026. However, if the current economic climate prevails there is likely to be considerable industry pressure to extend the scheme.

Full expensing capital allowances explained

Let’s take a deeper look at full expensing for capital spending:

Why has the government introduced full expensing?

The UK government introduced full expensing for capital allowances from April 2023 to March 2026 to encourage business investment. This policy enables companies to deduct 100% of eligible plant or machinery expenses in the first year, reducing annual costs by up to 25%. It aims to offset the impact of the rise in the corporation tax rate to 25% and stimulate economic growth. Unlike previous deductions, full expensing is uncomplicated, with fewer intricacies, providing a generous and simplified form of capital investment relief for businesses.

What qualifies for full expensing capital allowances?

Full expensing covers plant and machinery expenditure when the following criteria are met:

  • The assets must be new and unused.
  • The expenditure must be incurred by a company.
  • There is no upper limit that can be claimed each year.
  • Clawback provisions apply that are different from normal pooling.
  • Leased assets are excluded, as are cars and expenditure on buildings (but see below).

How long will full expensing capital allowances be available?

Full expensing is in place for three years from April 2023 until the end of March 2026.

Full expensing and special rate pool

Although structural building elements will not qualify for full expensing, assets that normally qualify for special rate pool (such as electrical systems, heating and long-life assets) will qualify with a 50% first year allowance.

Annual investment allowances

In addition, the current annual investment allowance (AIA) is also available and extends to partnerships and individuals. The maximum annual claim is £1m but elements that qualify as special rate receive the 100% first year allowance.

Speak to ForrestBrown – Capital allowances specialists

If you have any questions regarding full expensing and capital allowances please contact ForrestBrown’s Director of Capital Allowances, Peter Reynolds ATT (Fellow) ICIOB at p.reynolds@forrestbrown.co.uk.