Author: Matthew Jeffery, Tax Director
The recent Spring budget announced the introduction of the new ‘full expensing rules’. Matt Jeffery, partner at Zeal Tax takes a look at the new rules and what this means for business owners.
Full expensing explained:
Full expensing is a capital allowances tax scheme that lets UK companies deduct 100% of the qualifying Main Pool Plant & Machinery expenditure from their profits in the year it is bought, instead of spreading the cost across multiple tax years.
This includes assets such as machinery, equipment, computers and furniture to name a few. It’s also applicable to the purchase of commercial property. Introduced in the UK Government’s Spring Budget 2023, the scheme runs from 01 April 2023, to 31 March 2026.
Full expensing replaces the Super-Deduction capital allowance, which expired on 31 March 2023. Although very similar, it is less generous than Super-Deduction, which was introduced as a special measure to help UK businesses recover from the pandemic.
How does it work?
Having had the opportunity to review the draft legislation, it’s plain to see that the new rules are a clear continuation of the Super-Deduction.
The new scheme is offered in the same way, in that allows companies to write off a percentage of the cost of investment in qualifying plant and machinery in one go, however, the 130% enhancement has been reduced to 100% – now equivalent to a tax saving of up to 25p for every £1 spent.
The new scheme however, still comes with many of the restrictions that were in place in the original scheme:
Assets must be unused and not second-hand.
This is particularly important to note in relation to property purchases. Full expensing is not available on qualifying assets included in a property transaction, unless they are unused (i.e. from a developer). The Annual Investment Allowance (AIA) may still be available in this case.
Asset must not be a car.
Cars have their own set of rules based on emissions. Commercial vehicles that do not fit the definition of a car may still benefit.
Cannot be expenditure on a long-life asset.
Long-life assets typically include plant & machinery assets with an expected economic life of more than 25 years. Outside of any first-year allowances, main pool assets that are caught by the long-life asset rules attract special rate pool treatment, and are specifically excluded from full expensing.
Assets purchased for leasing are restricted.
As many businesses hold their property in one entity, while another company might operate from the building under a lease or licence (PropCo – OpCo arrangement), this area of the legislation may prove to be problematic at times. For expenditure incurred by the PropCo, full expensing will not be available, except where the assets are considered “background plant & machinery”, which in itself is difficult to define.
Clawback where assets subsequently sold.
Whilst its normal to expect clawback for first year allowances, when the assets are subsequently sold for proceeds, balancing charges may arise. It is therefore important to keep an accurate record of the different assets to be included in a Full Expensing claim.
Are there any “Contract Date” conditions?
At present the new rules have no contract date requirements, which is a welcome change from the Super Deduction and something which is set to simplify the process of claiming. The only timing restriction at present is that the expenditure must be incurred after the 1st of April 2023. This is good news for companies already underway with improvement projects prior to the Spring Budget.
An example of full expensing . . .
The example below shows how a business could benefit from the full expensing relief:
A manufacturing company has gross annual profits of £5 million in the 2023-24 tax year. Instead of paying corporation tax of £1,250,000 on this sum, the business purchases a new warehousing facility, spending £2 million on various items of main rate plant and machinery.
By claiming the £2 million under full expensing in the year the expenditure is incurred, the company can deduct the whole sum from their gross profits and reduce their corporation tax bill to zero. The £1,250,000 they would have paid in tax is now set against the cost of the warehouse, reducing the real expense by 75% to £250,000.
Therefore, despite some restrictions, Full Expensing is still great news for companies looking to invest in the UK.
How can Zeal help?
Whether you choose to use full expensing or another tax deduction scheme, it makes sense to make the most of capital allowances. We have a dedicated asset finance team ready to help you secure the highest tax relief.
To speak to our team, call 01633 287898 or email firstname.lastname@example.org for more.
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This article was written by Matt Jeffery, Tax Partner at Zeal Tax. Zeal, a leading capital allowances specialist in the UK, as an educational piece to help business owners understand their tax relief entitlement. Matt can be contacted either by calling 01633 287898 or by email on email@example.com. Zeal Tax offers a FREE, no obligation consultation and estimate of the tax savings and refund you could achieve.
Disclaimer: Whilst every effort has been made to ensure accuracy at the time of publication, April 2023, information contained in this document may not be comprehensive or reflect individual circumstances or may be subject to subsequent revision and legislative changes. Readers should therefore not act on any information without seeking professional advice.