Goodbye super deduction, hello full expensing

16 May 2023
Investment is a key driver of productivity growth, but business investment has been a longstanding weakness in the UK, highlighted by recently published HM Treasury data confirming that UK business investment as a proportion of GDP is lower than the OECD average. In an effort to encourage capital investment to address this and ensure that the pre-announced increase in the main rate of corporation tax from 19% to 25% on 1 April 2023 did not exacerbate the problem by incentivising companies to defer expenditure to later periods when the tax relief available would be more valuable, the government introduced the 130% super-deduction to the UK capital allowances regime in 2021. 

A long-term solution? 

Subsequently, but prior to the end of the super-deduction on 31 March 2023, the government issued a capital allowances consultation document to help in its efforts to foster a new culture of enterprise and growth in the UK, as part of its tax plan to bridge this investment gap. The consultation considered a number of policy options, including a potential ‘full expensing’ first-year allowance, which would be more generous than any other similar relief implemented on a permanent basis by a G7 country. 

It was announced in the Spring Budget 2023 that the new full expensing policy would be introduced for certain capital expenditure incurred in the three years from 1 April 2023, with a less generous temporary first-year allowance for certain other capital expenditure also set to continue. The combined average cost to the exchequer of these measures is estimated at £9bn per year.

Full expensing – big brother 

Full expensing is a 100% first-year allowance, which allows companies to claim a deduction from taxable profits that is equal to 100% of their qualifying expenditure in the year that the expenditure is incurred. To qualify, expenditure must be incurred on the provision of main pool plant and machinery on or after 1 April 2023 but before 1 April 2026. However, there are a number of conditions to be met, including that the plant and machinery must be new and unused, must not be a car, must not have been given to the company as a gift, and must not have been bought to lease to someone else (although corporate landlords may benefit in respect of background plant and machinery in a leased property).  

Full expensing is available to companies subject to corporation tax only. Therefore, unincorporated businesses cannot claim, but are instead entitled to claim the annual investment allowance, which offers the same benefits as full expensing for the capital expenditure it covers, up to £1m per year.

50% first-year allowance – little brother

Special rate pool expenditure does not qualify for full expensing, but a 50% first-year allowance can be claimed instead, subject to the same conditions that apply for full expensing. 

Tax compliance – what to look out for

The new rules for claiming the two new first-year allowances do not appear to be so onerous as for the super-deduction, which was fraught with potential pitfalls. In particular, the draft legislation does not include complex commencement provisions for expenditure incurred under pre-agreed contracts. 

In practice, this means that qualifying expenditure incurred within the three-year temporary window should benefit, including expenditure incurred under contracts entered into prior to 1 April 2023 and, intriguingly, potentially under contracts entered into before 3 March 2021 (which could not have qualified for the super-deduction if incurred between 1 April 2021 and 31 March 2023).

As outlined above, however, general exclusions do apply and specific anti-avoidance rules may also need to be considered when preparing computations. In addition, new disposal rules are introduced, which may cause complications and give rise to a requirement for assets to be tracked where the new full expensing and first-year allowances are claimed. 

Take advice

Whilst there are less stringent rules around the application of full expensing relative to the super-deduction, care must be taken as this is new legislation and capital allowances remains a particularly complex area of tax law. 

For more information, please get in touch with Peter Graham, Paul Smith, Rupert Guppy or your usual RSM contact.