It was no surprise that the Government announced the extension and permanence of full expensing in the 2023 Autumn Statement. This bold fiscal measure, which came into effect in April 2023 and was originally intended to end in March 2026, is intended to boost business productivity, growth and investment by offering up to 100% first-year allowance on qualifying plant and machinery purchases. In light of the announcement to make full expensing a permanent measure, we provide up to date guidance on how full expensing works and its benefit to British businesses.

From Super Deduction to Full Expensing

In order to best understand full expensing, it is helpful to set it within the context of the previous Super Deduction, which came to an end in April 2023. Initially introduced as a response to the corporation tax rate increasing from 19% to 25%, the Super Deduction offered an increased upfront 24.7% saving before the increase in the main rate of Corporation Tax. This was largely considered successful in driving higher levels of capital expenditure by British companies.

The concept of full expensing as an ongoing driver of business growth within the UK emerged as a successor to the Super Deduction. While both aim to incentivise companies, the key difference lies in the rates of relief.

For companies making purchases of qualifying plant and machinery, the Super Deduction offered an unlimited 130% allowance, whereas the now permanent 'full expensing' provides a 100% first-year allowance.

Businesses should not forget the Annual Investment Allowance (AIA) which provides 100% relief for plant and machinery investments up to £1 million, which is available for all businesses including unincorporated businesses and most partnerships.

What is Full Expensing?

Full expensing offers companies the opportunity to obtain relief for the full cost of certain capital expenditure in the year it is incurred, as opposed to relief being obtained over a number of years through writing down allowances.

This tax relief, which is applicable to all sizes and sectors of UK corporation tax-paying businesses, aims to incentivise businesses to invest in capital assets for growth.

Under the full expensing rules, companies can deduct 100% of the cost of qualifying capital investments, including new plant and machinery, and other qualifying items. These qualifying items encompass a range of assets, from manufacturing machinery and security systems to computers and office furniture. However, it is important to note that the emphasis in full expensing is on acquiring new and unused qualifying plant and machinery. Second-hand equipment, whether from third parties or connected parties, are excluded from the relief.

With regard to assets bought for leasing, a provision that carries over from the Super Deduction measures states that assets bought for leasing typically do not attract first year allowance, unless certain conditions are met.

The benefits of full expensing are twofold. Firstly, it enhances cash flow for businesses, as the immediate deduction reduces their tax liability, freeing up funds for other investments or operational needs. Secondly, the policy serves as a catalyst for increased investment in capital assets by providing more immediate tax benefits, fostering heightened productivity, efficiency, and job creation.

An example of Full Expensing in practice

For example, a company incurs expenditure of £1.5m on state-of-the-art machinery designed to increase production capacity in 2024. Without the benefit of full expensing, the business would be required to spread the allowances on this investment over multiple years, limiting the immediate deduction available. However, with full expensing, the business is able to deduct the entire £1.5m in the tax year of the purchase.

Assuming the company is subject to the main rate of Corporation Tax, the company stands to save £375,000 in taxes (£1.5m x 25%) in the year 2024 through full expensing. As a result, the company's cash flow is improved and has the opportunity to reinvest the tax savings offered by full expensing into further operational improvements or additional strategic investments.

50% First Year Allowance

The current 50% first year allowance, originally introduced alongside the Super Deduction, which allows companies to obtain relief for half of the cost of certain special rate and long life plant and machinery remains unchanged, and has been introduced permanently rather than ceasing in 2026.

If a company also incurred £1m of expenditure on a new heating system in 2024, which would qualify as special rate expenditure, the 50% first year allowance allows the company to obtain additional relief of £500,000 in 2024. This amounts to an additional £125,000 (£500,000 x 25%) tax saving. The remaining balance of expenditure will be added to the special rate pool with relief obtained at 6% per annum on a reducing balance basis.

Future impact of Full Expensing

With both full expensing, and 50% first year allowance for special rate expenditure, and, similar to the previous super deduction, allowances can be clawed back upon future sale of the asset. Therefore Companies should not forget the ability to utilise the Annual Investment Allowance (AIA) of £1 million, which was made permanent at this level from 1 April 2023.

AIA should be prioritised against assets attracting lower rates of relief in the special rate pool, but to the extent the AIA limit has not already been used, then it is normally preferable to claim 100% AIA rather than full expensing due to the way proceeds are taxed when the assets are sold.

As most companies will be obtaining tax relief under the capital allowance regime much faster than assets are depreciated for accounting purposes, deferred tax liabilities recognised on the balance sheet will continue to grow.

Allowing for longer term planning for business owners

The extension and permanence of full expensing capital allowances mark a strategic opportunity for companies in the UK. As a transition from the successful Super Deduction, the emphasis on new and unused assets, coupled with clarified regulations, provides a clearer path for businesses to benefit.

The original three-year window in which the full expensing rules were set to apply meant that any plans to carry out cost-effective and substantial capital expenditure was quite restrictive. With no end date to the reliefs, there is now far more scope for medium to longer term planning of capital expenditure for business owners.

The Chancellor's commitment to extending the full expensing period reflects government responsive to industry needs, fostering an environment conducive to sustained economic growth and investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.