What is Full Expensing?
- The term is used to refer to a type of first-year allowances for certain expenditure incurred from 1st April 2023 on plant and machinery.
- Full expensing is one of the biggest business tax cut in modern British history. It’s been introduced to replace the 130% super deduction relief in 2023 to encourage business to invest more so they minimise the tax bill due to the increase in the corporation tax from 19% to 25%. The cost to treasury is estimated at 10bn a year.
- The rules applies to expenditure on plant or machinery that is acquired new and not second-hand, must not be a car, given to the company as a gift, or bought to lease to someone else.
Who can benefit?
- Must be chargeable to corporation tax (i.e. companies)
- Must hold the property as an investment i.e. Not available to developers
- Can be freehold or leasehold expenditure.
- Needs to be a commercial property – some exceptions FHL, student / residential communal.
- Must own the asset (S11 CAA 2001).
How does Full Expensing work?
- Is a 100% first-year allowance which allows companies to claim a deduction from taxable profits that is equal to 100% of their qualifying expenditure in the year that expenditure is incurred.
- Expenditure must be incurred on the provision of “main rate” plant or machinery on or after 1 April 2023.
- For “special rate” expenditure, which doesn’t qualify for full expensing, a 50% first-year allowance may be claimed instead, subject to the same conditions that apply for full expensing and then 6% writing-down allowances on the balance.
- The Annual Investment Allowance (AIA) provides 100% first-year relief for plant and machinery investments up to £1 million, which is available for all businesses including unincorporated businesses and most partnerships.
Example
A company incurs expenditure on a new art production line including £10 million on various items of main rate plant and machinery. In addition, the company spends £2 million installing a brand-new electrical system, which is special rate expenditure.
Because of the new full expensing and 50% first-year allowance, the company can claim £10 million under full expensing (in one year) and £1 million under the 50% first-year allowance in the year the expenditure is incurred. The remaining balance of £1 million can be depreciated at 6% writing down allowances to the special rate pool in a subsequent accounting period.