Full Expensing explained

After the Autumn Statement announced by the Chancellor, Jeremy Hunt, there has been much talk about full expensing.  Very few know much about full expensing so we asked a member of our tax team, and Corporate Tax expert, Sabir Islam to explain full expensing, the history, who qualifies and, the advantages and disadvantages.

Full Expensing (FE), is anything permanent?

Before we go any further, let’s take a look at the history.  Under UK tax rules, companies do not generally get tax relief for the depreciation charge in the accounts related to the historical purchase of qualifying plant and machinery. Instead, tax relief for qualifying plant and machinery is obtained through the capital allowance tax regime.

A company can potentially write off the entire costs of qualifying plant and machinery in the period of acquisition through what is known as the Annual Investment Allowance (AIA). The amount of AIA that can potentially be claimed by a singleton company is £1m in a year while groups of companies must share the £1m AIA amount.

Full expensing (FE) was introduced in April 2023 for a period of 3 years. FE was regime to compensate for the loss of the 130% super-deduction. The super-deduction was introduced during Covid for a limited period of 2 years to stop companies from deferring capital expenditure until after April 2023 when the main rate of corporation tax increases to 25% from 19%.

FE is part of the capital allowances regime. Fundamentally the capital allowances regime is a cashflow exercise which is used to alter the timing and rate of tax relief on qualifying expenditure.

Who qualifies for Full Expensing?

Full Expensing is only available for companies and partnerships where all the partners are companies.

As the name suggests, the company gets tax relief for the entire costs of the plant and machinery – similar to AIA.

What is the ‘big deal’ if we can claim AIA?

You are probably wondering what the big deal is with FE if AIA is available. For most companies, the FE regime will be irrelevant to them as expenditure on plant and machinery is likely to be covered by the AIA.

However, unlike the AIA which is limited to £1m worth of expenditure in a year, there is no such monetary limit for FE. Large singleton companies or groups with capital expenditure of more than £1m in a year, will benefit from FE as AIA would have been exhausted i.e. get tax relief on the full cost of the item for expenditure exceeding £1m in the year.

Are there any disadvantages of Full Expensing compared to AIA and what items potentially qualify?

There are certain rules that are common to both AIA and Full Expensing such as:
• cars will not qualify although 100% FYA is potentially available for electric cars,
• purchase cannot be from a connected party,
• not available when the qualifying activity of the company is permanently discontinued.

FE can only be claimed on qualifying expenditure provided the item is new and unused. There is no such requirement for AIA.

FE is not generally available on plant or machinery for leasing (with some limited exemptions).

Very broadly, FE tax relief is available on new and unused plant and machinery that would be ‘pooled’ into the general pool such as office equipment/furniture, vans and cameras to name a few items. Buildings and structures including doors, ceilings and walls do not benefit from FE although Structures & Buildings Allowance may be potentially available. FE is not available on plant and machinery that would be classed as integral features (lifts, air conditioning etc) but AIA is still available on such items.

The other drawback compared to AIA is that it makes the tax computation much more complicated and potentially more costly to administer.

What happens when my company sells an asset to an unconnected party?

If a company sells a piece of plant and machinery which FE has been claimed in full, it will almost undoubtedly be sold for less than the original purchase price. So even though the company will have sold at a loss, the proceeds are still taxable.

For example, the disposal of an asset on which a company has claimed FE in full, the company is required to bring in an immediate balancing charge equal to 100% of the disposal value. This means that if the company sold an asset to an unconnected party for £20,000 on which they had claimed FE in full, they would be required to increase their taxable profits by £20,000.

What was the change announced in Autumn Statement 2023

The major announcement was that the FE regime was made permanent rather than being available until 31 March 2026.

We would point out that there will be a General Election in 2024 with the possibility of a change in the Government. Any new Government will undoubtedly have new ideas!

If you wish to read the full HMRC guidance on Full Expensing it can be found here.

If you do have any further questions, please contact us on 020 7870 9050 or contact your usual RPGCC contact.  You can also contact us via our webchat which is operated by us during office hours, and you can leave a message outside.

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