A new capital allowances offering

For qualifying capital expenditure incurred from 1 April 2023 – 31 March 2026, measures include:

• 100% first year relief, or full expensing, for qualifying plant and machinery investments which would enter the main pool for capital allowance purposes
• 50% first year relief, for expenditure on special rate (including long life) assets 

The availability of an Annual Investment Allowance (“AIA”) of £1 million for plant, machinery and special rate assets has been made permanent as expected and extends availability to unincorporated businesses and most partnerships. The £1m AIA limit is shared by a corporate group.

Why are the government introducing full expensing and how will this work?

In 2021, UK business investment accounted for 10% of GDP in comparison to the OECD average of 12.5%. Whilst the corporation tax rate is increasing to 25% from 1 April 2023 for most corporates, it is still the lowest rate in the G7 and the combination of a low rate with investment incentives to reward ambitious businesses is an attempt to create a fertile ground for sustained economic growth.

The success of the 130% super- deduction, which draws to a close on 31 March 2023, encouraged planned investments to be brought forward by companies and supported the post-pandemic UK economic recovery.

Full expensing is a 100% first year allowance for expenditure incurred by companies that are subject to corporation tax (therefore unincorporated businesses are excluded, although they will continue to benefit from the AIA). As with the super-deduction, the amount of expenditure that can qualify is uncapped. Items that may be eligible for the relief include most tangible capital assets other than land and structures and buildings, that are used in the ordinary course of business such as machinery, office and warehousing equipment, vehicles (but not cars), construction equipment. £100,000 of eligible expenditure could reduce a company’s corporation tax bill by £25,000 in the year of purchase for entities subject to the 25% rate of tax.

Companies investing in special rate (including long life) assets will also benefit from a 50% first-year allowance in the year of investment. Items eligible for special rate relief typically include integral features of buildings such as electrical works, heating systems and lighting.  

What happens when the assets are disposed?

When fully expensed assets are disposed, the full disposal value will be brought to charge, increasing taxable profits by the full disposal value.

Where the 50% first year allowance has been applied to a special rate or long-life asset, 50% of the disposal value will be brought to charge with the remaining 50% disposal value deducted from the special rate pool.  

Other points to note

Whilst expenditure on plant or machinery for leasing is excluded from first -year capital allowances, the government are reviewing a bespoke offering for the industry to mitigate the scope of abuse. 

The deferred tax implications of assets written down in tax computations which will be far quicker than they are depreciated in the accounts.

Please speak to your corporation tax contact for more information on what these rules could mean for your business.

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