Full Expensing: How does it work?

At the Autumn Statement 2023, chancellor Jeremy Hunt announced that full expensing would become a permanent capital investment allowance for UK businesses.

What is full expensing?

The full expensing scheme offers companies the opportunity to claim 100% capital allowances on commercial vehicles, plant and machinery investments. This allows businesses to deduct the full amount of the asset against tax in the financial year that it’s purchased. As of November 2023, the government have made full expensing a permanent scheme.

A 20222 survey showed that businesses indicated a clear preference for full expensing over any of the other capital investment options. This was down to the simplicity and generosity of the scheme, allowing companies to write off the cost of investment in one go.

How does full expensing work?

Under full expensing, for every £1 a company invests in plant and machinery, their taxes are cut by up to 25p.

It’s important to note that full expensing is only available to companies that are subject to Corporation Tax. There are other options available for unincorporated businesses including the AIA; a capital allowance incentive offering the same benefits as full expensing for investments of up to £1 million per annum.

To qualify for full expensing, commercial vehicles, plant and machinery must be new and unused. It must also not be a car, gifted to a company or bought to lease to somebody else. Assets purchased on HP also qualify, so this is a great opportunity for businesses to take advantage of full expensing.

In action, a business that makes £100,000 pre tax profit and has bought £100,000 of machinery in the financial year can offset the full amount against taxable profits, resulting in no tax being paid. The full expensing scheme is a real incentive for businesses to reduce their tax payable.

Why is the government making full expensing permanent?

It goes without saying that investment is a key driver of productivity growth. However, business investment hasn’t been a strongpoint within the UK. In 2021, UK business investment accounted for 10% of gross domestic product (GDP) compared to the Organisation for Economic Co-operation and Development (OECD) average of 12.5%.

To encourage companies to make additional investments, the government introduced the super-deduction in 2021. This was the biggest two-year tax cut in modern British history. This incentive also encouraged businesses to bring planned investment forward whilst the UK recovered from the Covid-19 pandemic.

The extension of full expensing builds on the success of super-deduction by rewarding businesses that invest and create the right conditions to sustain economic growth. As a result of this measure, the government plan believe the UK’s capital allowance regime will be world-leading.

What assets qualify for full expensing?

Most tangible capital assets (excluding structures, buildings and land) that are used within a business are considered as plant and machinery for the purpose of claiming capital allowances. This can include (but isn’t limited to):-

  • Office equipment such as desks and chairs
  • Commercial vehicles including vans, lorries and tractors (not cars)
  • Construction equipment such as bulldozers, excavators and compactors
  • Manufacturing equipment, food processing and industrial machinery
  • Computers, printers, lathes and planers
  • Warehouse equipment such as pallet trucks, forklift trucks and shelving and stackers
  • Some fixtures such as bathroom and kitchen fittings and fire alarm systems in non-residential property.

Other Capital Allowance incentives

If the full expensing scheme isn’t ideal for your business or your assets don’t qualify, not to worry. There are still other Capital Allowance options to consider:-

  • Annual Investment Allowance (AIA) – provides 100% first-year relief for plant and machinery investments up to £1 million. This is available for all businesses (including unincorporated businesses) and the majority of partnerships. Expenditure on used and second-hand assets and those bought to lease to someone else can still qualify for Annual Investment Allowance.
  • 50% First Year Allowance (FYA) – The 50% first-year allowance (FYA) for expenditure by companies on new special rate longer life assets until 31 March 2026. This includes assets with integral features such as lifts, solar panels, air-conditioning and heating units. It also covers fixture assets such as fitted kitchens, bathroom suite and fire alarm & CCTV systems.

Considering purchasing assets?

If you’re considering purchasing new assets, PMD can help you via our dedicated team of experienced professionals. With access to an extensive panel of funders, we can secure the most competitive rates to suit your current needs. Get in touch with us to get more information about the services we provide or to answer any questions you may have around the full expensing scheme. To stay up to date with the latest PMD news, follow us on LinkedIn.

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