Capital Allowances and the New Full Expensing

The super deduction, the 130% first-year allowance for eligible capital expenditure, is no longer available for spending incurred post-31 March 2023. For qualifying amounts incurred from 1 April 2023 a new temporary first-year allowance, running until 31 March 2026, known as ‘full expensing’ will instead be available.

100% relief will be given for main rate expenditure (e.g. plant, manufacturing equipment, IT equipment, furnishings) which would ordinarily only qualify for 18% writing down allowances. If £100,000 of qualifying assets were purchased, this would result in year one tax savings of £25,000 vs £4,500 (a corporation tax rate of 25%) using traditional writing down allowances.

Whilst the relief may appear to be a reduction based on the previous super deduction, given the increased corporation tax rate of 25%, companies within this rate will still obtain relief of 25p per £1, the same amount previously achieved with 130% relief at 19% corporation tax.

In addition to the full expensing, a 50% relief for special rate expenditure (e.g. electrical or lighting systems) is available; such expenditure would ordinarily qualify for only a 6% writing down allowance per year. Taking the earlier example of £100,000 of qualifying assets purchased, there are year one tax savings of £13,250 (including writing down allowances on the remaining 50%) vs £1,500 using just writing down allowances.

These new reliefs are generally available for assets purchased new and unused and exclude assets such as cars, most assets used for leasing and assets purchased from connected parties.

If an asset on which full expensing relief has been claimed is sold in the future, the company will be required to bring in an immediate balancing charge equal to 100% of the disposal value. Similarly, an immediate 50% balancing charge is brought into account for special rate assets, on which the 50% relief was claimed, with the remaining 50% being deducted from the special rate pool.

In certain cases where a property is being sold with fixtures in place, where full expensing had been claimed, it can be possible to avoid the need to bring in a balancing charge if a section 198 election is utilised in the right way on sale; this election sets the value at which capital allowance items move across to the buyer.

The annual investment allowance (AIA) remains at £1million. Similarly, structures and buildings allowances (SBAs) remain unchanged, giving a writing down allowance of 3% on all qualifying expenditure.

Full expensing vs annual investment allowance

With 100% relief under full expensing (no annual limit) and AIA (limited to £1m per year), the question comes as to which relief to claim. It’s clear the AIA should first be allocated to any special rate expenditure which doesn’t qualify for full expensing. Secondly, to main rate assets purchased second hand, to be leased, or from connected parties given the lack of availability for full expensing. Any remaining AIA may be used against main rate assets that could qualify for full expensing, given the lower likelihood of clawbacks or immediate balancing charges on disposal; however, whether this is the correct course of action will depend on the expected residual value and timing of any disposal.

AIA does however need to be shared between group companies and companies under common control, therefore any allocation of AIA should be carefully considered if there are such companies involved to ensure maximum relief is obtained.

If you are considering any significant capital purchases, start speaking to your advisors early to plan effectively. Our experienced Corporate Tax team will always welcome a conversation around such planning methods.