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Is full expensing a capital allowances revolution or red herring?

Director - Capital Allowances
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In what was billed as a game changer for British businesses, the Chancellor made full expensing permanent in his Autumn Statement on 22 November 2024.

What had initially been a time limited policy set to end in 2026 was extended indefinitely, with the intention of boosting capital investment.

While welcome, the flurry of headlines which followed making full expensing permanent do risk obscuring other allowances which may be more beneficial for many businesses. 

Why was full expensing introduced in the first place?

When an increase in Corporation Tax was announced in March 2021, the super-deduction was introduced to mitigate the impact. When the super deduction came to an end (on 31 March 2023), there was an expectation that the government do something to fill the gap.

The Spring Budget 2023 saw the announcement of full expensing for the next three years. Later the same year, the Autumn Statement made this previously time-limited relief permanent. This was billed by the Chancellor as the largest business tax cut in modern British history, with the OBR forecasting it will increase annual investment by around £3 billion a year.

What is full expensing?

Full expensing is a capital allowance which provides a 100% deductible first year allowance on qualifying expenditure, including new plant and machinery. Under full expensing, for every pound a company invests, there taxes are cut by up to 25p.

Plant and machinery that may qualify for full expensing includes machines (such as computers), office equipment (such as desks and chairs), vehicles (such as vans and lorries, but not cars), tools and some fixtures. Special rate expenditure which doesn’t qualify for full expensing is subject to a 50% first year allowance.

Full expensing contrasts with traditional depreciation method, where the cost of assets is deducted over several years.

Our capital allowances explained page provides further details on the different capital allowances available.

Behind the headlines: what business need to know

Full expensing will certainly deliver a boost for the UK’s biggest businesses. But for many (including unincorporated businesses and partnerships), the Annual Investment Allowance (AIA) will remain more beneficial. That’s because, while full expensing delivers a 25% cash benefit to profitable companies on their investment in plant and machinery, this is matched by the AIA alongside a better rate for special rate items which fall outside the general pool.

Although the AIA is capped at £1 million a year, the vast majority of UK business investment falls below this threshold making it a preferable option for as many as 99% of businesses.

While businesses may want to review their approach to capital allowances following the introduction of full expensing, it’s important they look behind the headlines. Understanding how different asset classes, rates and allowances interact could uncover potential savings and free up funds for further investment.