Full expensing – should this just be the beginning?

13 January 2024

Full expensing allows corporate businesses to deduct the full cost of certain qualifying plant and machinery in the year of investment for corporation tax purposes. This policy was previously in place on a temporary basis from 1 April 2023 to 31 March 2026, but in his 2023 Autumn Statement the chancellor made this change permanent. The certainty that permanence provides is a welcome change from recent years, but there are number of related issues which suggest full expensing isn’t a silver bullet to solve the problems caused by a lack of business investment.

Firstly – what about all the businesses that are subject to income tax rather than corporation tax? Whilst the annual investment allowance allows most businesses to deduct in full any spend on qualifying plant and machinery up to a limit of £1m per year, large scale partnerships, LLPs or sole traders are at a tax disadvantage compared to companies with similar capex profiles. This feels counterintuitive, as it could be argued that a fair and effective tax regime should provide very similar tax outcomes for very similar transactions by very similar businesses. 

Secondly, don’t forget that full expensing only applies to the ‘main pool’ of expenditure qualifying for capital allowances, a tax category that covers equipment, IT assets and plant or machinery that has an expected life of less than 25 years. Most expenditure on building services such as lighting, electrical installations, heating and air conditioning does not fall within the main pool. For these assets, known as ‘special rate pool’ assets, the related regime only allows an initial 50% deduction as opposed to 100%. The remaining balance receives tax deductions at 6% per year on a reducing balance basis. It takes another 26 years for 90% of the potential full tax relief to be received. 

Similarly, the structures and buildings allowance, which applies, as the name suggests, to building works and certain other expenditure on tangible fixed assets that are not plant and machinery, provides 3% tax relief each year – this time on a straight-line basis, requiring over 33 years to achieve full tax relief. To give context, imagine a building constructed in 1993 and ask yourself if this building in its original state is still fit for purpose in 2023.

Finally, capital allowances are valuable, but mostly for profitable businesses with tax liabilities. Many fast-growing companies endure years of losses as they scale up. The UK tax system should encourage these businesses to continue to invest as they grow. For example, by taking on new space, developing new production facilities or locating their headquarters in the UK. A parallel can be drawn here with the research and development tax regime, where loss-making small and medium-sized companies (restricted to R&D intensive companies only from 1 April 2024) are able to surrender their loss for a payable tax credit – helping cashflow in those early loss-making years.

A three-point plan combining the above could build on the positive news of full expensing and enable transformational change in UK business investment, by:

  1. extending full expensing to all business types - removing the distortion between companies and other business structures;
  2. increasing the rates of relief for special rate pool assets and structures and buildings - this could be tied to the important environment, social and corporate governance (ESG) agenda too (for example, for buildings that meet an agreed energy performance criteria, relief on the special rate pool expenditure elements could be accelerated to four years, with eligible structures and buildings expenditure relieved over 10 years, similar to buildings in a freeport site); and
  3. creating a payable tax credit for loss-making companies making capital investments, provided at a lower rate, for example 15%, than the 25% corporation tax rate - this could significantly ease the cashflow challenges of fast-growing companies rather than deferring the benefit until future years when they become profitable

Full expensing represents a statement of intent to address a previously unfavourable tax regime for business investment. However, by being even braver, perhaps in the upcoming Spring Budget, the chancellor has an opportunity to move UK capital expenditure incentives from good to world-beating.