Full expensing: what your business needs to know

The 2023 Spring Budget brings changes for corporation tax and capital allowances. Read on for a break down of how your business might benefit.

Effective from 1 April 2023, FE lets businesses deduct 100% of the cost of qualifying plant and machinery from their taxable profits, and replaces the outgoing super-deduction which provided tax relief at 130% of the cost of the asset. The main developments are:

  • FE will last until 31 March 2026, although the Chancellor has said that he plans to make it permanent.
  • An extension to the 50% First-Year Allowance (FYA) on special rate assets until 31 March 2026 and a permanent increase of £1m to the Annual Investment Allowance (AIA).
  • Combined, FE and FYA are worth £27bn to businesses over the next three years.

For Ian Isaac, Managing Director, Lombard, the announcement is positive news: “Businesses need to invest in plant, machinery and other assets to improve their productivity and also be part of the Net Zero journey,” he says. “While Super Deduction ends in 2023, both Full Expensing and First-Year Allowance are in place for at least the next three years, and offer long-term support and predictability for business’ investment plans.”

At the same time, the corporate tax rate is increasing on 1 April 2023, and businesses that earn a profit of more than £250,000 in a year will incur a rate of 25%, up from the old rate of 19%.

Worked example: How might FE work in practice?

Suppose drink maker AcmeBrewX Ltd needs to invest in a forklift at its warehouse. The new system costs £12,000 and the company has taxable profits. Under FE AcmeBrewX would deduct the £12,000 from its profits, reducing its tax liability by £3,000. Under FE effectively for every £1 accounted in this way, a business’ tax bill reduces by 25p.

Is this a better saving for business than under the outgoing Super Deduction regime with the old rate of 19% corporate tax? In our example, the £12,000 cost, deducted at 130% but at 19% tax rate would reduce the tax liability by £2,964, so FE actually gives a minor improvement for companies paying tax at the 25% tax rate.

What counts as main rate equipment?

While the government doesn’t provide an exhaustive list of what counts as qualifying equipment - referred to as plant and machinery – it does provide some examples, and lists:

  • warehousing equipment such as forklift trucks,
  • tools such as ladders and drills,
  • construction equipment such as bulldozers and excavators,
  • machines such as computers and printers,
  • vehicles such as tractors, lorries and vans,
  • office equipment such as chairs and desks,
  • and, some fixtures such as kitchen and bathroom fittings

Note that the relevant legislation here, the Capital Allowances Act does not attempt to define ‘plant’ or ‘machinery’ (https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca21010), and there are intricate principles involving case law that complicate the issue.

The government will legislate for these two new major capital allowances later this year when exact details of the regime will be confirmed.

Ian Isaac says: “In most cases businesses should consult the services of a tax advisor to provide some guidance and peace of mind.”

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