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Capital Allowances: Exploring the New Incentives

September 12, 2023

Starting from April 2023, until at least the end of March 2026, UK businesses will be eligible for 100% capital allowances on qualifying plant and machinery investments. This full expensing relief has been introduced to incentivise business investment and compensate for the removal of the super deduction in March 2023.

Under this new relief, businesses will receive up to 25p of tax relief for every £1 invested into qualifying main pool assets, such as IT equipment, plant or machinery.

What Are Capital Allowances?

Capital allowances are tax relief schemes that let businesses deduct some or all of the cost of an item from their profits before paying tax. There are different types of capital allowances, including Annual Investment Allowance (AIA), Writing Down Allowances (WDAs), First-Year Allowances (FYAs), and Structures and Buildings Allowances (SBAs).

A Summary of the New Incentives

The Spring Budget 2023 has introduced the following benefits for businesses:

  • Full expensing relief, which offers 100% first-year relief on qualifying new main rate plant and machinery investments from 1 April 2023 until 31 March 2026
  • The 50% First-Year Allowance (FYA) for expenditure by companies on new special rate (including long life) assets until 31 March 2026
  • The Annual Investment Allowance (AIA), which provides 100% first-year relief for plant and machinery investments up to £1 million, is available for all businesses, including unincorporated businesses and most partnerships.

Why Is the Government Introducing Full Expensing?

The Government’s capital allowances regime consultation last year revealed that businesses preferred full expensing over other options under consideration because of its assumed simplicity and apparent generosity. Full expensing builds on the super deduction, allowing companies to write off 100% of the cost of investment in one go.

How Does Full Expensing Work?

Full expensing is a 100% first-year allowance that allows companies to claim a deduction from taxable profits equal to 100% of their qualifying expenditure in the year that expenditure is incurred. Qualifying expenditure must be incurred on the provision of “main rate” plant or machinery on or after 1 April 2023, but before 1 April 2026.

Full expensing is available only to companies subject to Corporation Tax. Unincorporated businesses cannot claim full expensing but are entitled to claim the AIA, which offers the same benefits as full expensing for the investments it covers (up to £1 million per year).

For special rate expenditure (typically integral features such as lighting, electrical systems, and HVAC), which doesn’t qualify for full expensing, a 50% first-year allowance can be claimed instead. This means that a company can claim a deduction from taxable profits equal to 50% of their qualifying expenditure in the year that expenditure is incurred. Capital allowances can be claimed on the balance of expenditure in subsequent accounting periods at the 6% rate of WDAs for special rate expenditure.

There are limitations to what assets qualify under full expensing. Excluded assets are listed under CAA 2001 s.46. These are the same exclusions as previously applied under the “Super deduction” enhanced capital allowance relief. Under these rules, qualifying asset for full expensing must be new and unused prior to purchase and plant and machinery that is gifted or purchased for leasing do not qualify. Finally, cars will not qualify for treatment under full expensing.

Example of Full Expensing and 50% First-Year Allowance

Suppose a company incurs an expenditure of £10 million on various items of the main rate plant and machinery for a new state-of-the-art production line. Additionally, the company spends £2 million installing a brand-new electrical system, which is a special rate expenditure.

Due to the new full expensing and 50% first-year allowance, the company can claim £10 million under full expensing and £1 million under the 50% first-year allowance in the year the expenditure is incurred. The remaining balance of £1 million can be added to the special rate pool in a subsequent accounting period.

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