Background
When the increase in the corporation tax rate to 25% was originally announced in March 2021, the super-deduction was introduced at the same time in an attempt to soften the impact of the transition. However, with the UK economy continuing to present challenging operating conditions at the point the super-deduction came to an end (on 31 March 2023), many expected the UK Government to do more to incentivise business investment.
The UK Chancellor did just that with the announcement of full expensing - a capital allowance, which provides a 100% deductible first year allowance on qualifying expenditure. Effectively, the (now permanent) full expensing allowance means companies should receive up to a 25% in-year tax deduction for capital expenditure on significant proportions of their plant and machinery.
The benefit of this relief is not just in its generosity (this is a significant capital investment relief, when compared to other tax deductions that were available in the last decade) but also in its simplicity. There are rules and restrictions that need to be adhered to for companies to claim (and take full benefit from) this allowance; however, there are no lists, no new criteria, and hopefully (as a result) limited areas that will be open to challenge by HMRC in the coming years.
How it works
Full expensing
Where a company incurs capital expenditure on assets that would otherwise qualify for the main pool (such as most loose plant and machinery, furnishings, manufacturing equipment, IT equipment and capital investment on software) it is entitled to claim a first year allowance and take a 100% in year deduction in respect of the expenditure.
So, for example, where a business would otherwise have a £1m tax liability, if they were to incur £2m of qualifying expenditure on a new production line then, by claiming the full expensing first year allowance, they would reduce their tax liability by £500k. Note: as the corporation tax increase to 25% will be phased in for companies over the twelve months to March 2024, the exact level of tax saving for a company may vary over this period.
Special rate first year allowance
In addition, for assets that would otherwise qualify for the special rate pool (such as electrical systems, lighting systems and long life assets) a 50% first year allowance is available (with the balance being introduced into the special rate pool as normal). When compared with the ‘normal’ 6% writing down allowances for such expenditure, this is a significant acceleration.
What should businesses be aware of?
- Full expensing is only available for expenditure on plant and machinery (expenditure on buildings, structures and land will not normally be eligible). There are also some notable exclusions, such as cars, as well as many assets used for leasing.
- The expenditure must be incurred by a company (or claimed by a corporate partner of a partnership who is within the charge to corporation tax).
- The assets must be new and unused (in practice there are some minor relaxations of this rule; however, these are the exception).
- As full expensing is a first year allowance, a claim must be made in the period in which expenditure is ‘incurred’ (please note this is a specific term for capital allowances purposes, and businesses in doubt should seek advice). Companies that typically claim allowances once projects are complete, or every few years, may need to adjust their capital allowances processes to benefit from this relief.
- Assets acquired from connected parties are excluded and therefore any group procurement arrangements (for example) should be considered to ensure that there is no risk of relief being denied as a result of this technicality.
Clawback on disposals
When an asset treated as qualifying for these new first year allowances is disposed of, the disposal value (usually the proceeds received) is brought in as a balancing charge (a taxable amount) in the period of disposal.
For example, a business incurs expenditure of £1 million in 2023, and claims full expensing. If it then disposes of those assets for £500,000 in 2024, those proceeds received will be taxed in the period. This differs from pooled expenditure where the proceeds are usually introduced into the relevant capital allowances pool (therefore, often not being fully taxed in that period).
It is worth noting that such ‘clawbacks’ on certain aspects of property disposals may be managed through appropriate capital allowances elections (CAA2001 s198 election).
Businesses should note that, where the special rate first year allowance is claimed, only 50% of the disposal proceeds are taxed on receipt (with the other 50% being brought into the special rate pool, reducing its value).
Further points to consider
While full expensing should be available for capital expenditure incurred on software, where such expenditure is capitalised as an intangible asset, elections may be required to permit such a claim. It is important to note that the split between capital and revenue expenditure on software continues to be an area of complexity and specialist advice is recommended.
There is an exclusion from first year allowances for most assets used for leasing and this will (as it did with the super-deduction) impact the availability of the full expensing for many companies. These restrictions are somewhat onerous (with the exception of the exemption for background plant and machinery within buildings - which has been welcomed by many corporate landlords) and therefore companies intending to rent, hire, lease or lend out items of plant or machinery should carefully consider whether full expensing will be available.
The scale of the deductions available as a result of full expensing will mean that companies may want to carefully consider how they utilise their tax attributes to manage their tax burden in both prior and future periods. Where the allowances create losses, companies may wish to consider how best to utilise them. Two examples would be: carrying back to an earlier period where the tax relief will be lower (19%) but the cash benefits immediate, or carrying the losses forward where, depending on the quantum of the loss, annual restrictions may apply.
Where companies are undertaking multi-year projects they should consider the timing of expenditure (particularly professional and preliminary fees) as, given this is a first year allowance, it would usually not be possible to treat past expenditure as qualifying for the relief in a later period of account.
With fewer restrictions and a lower chance of a clawback on the disposal of assets the Annual Investment Allowance (limited to £1m per year) remains an attractive capital allowance (particularly for special rate expenditure) and is likely to remain the first allowance used by most companies. Please note, complex rules apply regarding the sharing of AIA between group companies and groups under common control - if in doubt, please seek advice.
Following the announcement that full expensing would be made permanent, HM Treasury has announced a technical consultation for plant and machinery allowances focused on reflecting the long term change that has been made and seeking ways to simplify, amend or reduce areas that may no longer be relevant.
How can PwC help?
We have a team of dedicated capital allowances specialists made up of tax, accounting, technology and surveying professionals who consistently advise businesses, helping them to comply with, and benefit from, the current capital allowances regime including the complexities surrounding full expensing and other capital reliefs.
To discuss full expensing in more detail please get in touch directly, or speak to your usual PwC contact.
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