Companies now have access to a new First Year Allowance, referred to as Full Expensing, after the cessation of the “super-deduction” capital allowance in March 2023. This new allowance enables companies to claim a 100% deduction for tax purposes in the year of spend on particular capital investments.
The government have confirmed that this relief will be in place permanently. Companies that take advantage of this opportunity will be able to recover up to £250 of every £1,000 spent on capital expenditures against their tax liability. As a result, potentially seeing significant tax savings.
Full Expensing explained
Instead of spreading out tax relief over several years, businesses can speed up the process by claiming relief on qualifying expenses in the year the assets are purchased. This new relief enables companies to deduct eligible expenses from their taxes in the year of acquisition, rather than over an extended period of time,
Plant & Machinery Full Expensing
For qualifying plant and machinery main pool items, such as loose furnishings, plant and machinery, equipment and software, eligible companies will benefit from a 100% first year capital allowance.
For example, consider a company that has a corporation tax liability of £1 million for the 12-month period ending on 31 March 2024. Additionally, this company has invested £1 million in qualifying expenditure to enhance its production line machinery. The Full Expensing first year allowance will effectively reduce the company’s corporation tax liability by £250,000.
Special Rate First Year Allowance
Special rate or integral feature assets that qualify for the 50% initial year allowance do not have a cap or limit imposed on them. These assets typically include essential features like lighting, air-conditioning units, and long-life assets. The remaining 50% of the expenditure will be relieved through the ‘typical’ 6% writing down allowances.
Annual Investment Allowance (“AIA”) and planning
The AIA, which gives a 100% deduction on eligible spending up to a £1 million yearly cap, is still available to businesses. Depending on the conditions of the company, it may be more profitable to forego the 50% special rate first year allowance and instead claim the AIA up to £1 million. For maximum tax efficiency, if the expenditure eligible for the special rate pool exceeds £1 million, the extra amount may be claimed using the special rate first year 50% allowance.
Who Is Eligible to Claim the Allowance?
In light of the current corporation tax landscape, where the prevailing corporation tax rate stands at 25% and the marginal rate at 26.5%, it is imperative for companies to ensure they are effectively utilising the available tax reliefs to mitigate the consequences of this tax rate escalation. Full Expensing will be particularly beneficial to groups or companies seeking to invest in new and unused:
- Plant and machinery / production lines
- Undertaking an office fit-out
- Computer software systems upgrades
- Renovating commercial property (e.g., hotel, care homes, factories, and warehouses)
Which expenses are eligible for Full Expensing?
Full Expensing bears several similarities to the super-deduction. Nevertheless, it is crucial to emphasise that Full Expensing will solely apply to recently acquired, unused assets that have not been previously owned, and will be subject upon specific qualifying criteria for assets.
The assets encompass a range of items, including but not limited to:
| 100% Relief – Full Expensing | 50% Relief – Special Rate |
| Plant & Machinery | Air Conditioning & Heating Systems |
| Fixtures & Fittings | Lighting |
| Computers | Electrical Systems |
The above are only examples of assets that will typically qualify for relief. However, the exclusions for First Year Allowance will remain valid, much like the case with the super-deduction.
Exclusions
The Full Expensing legislation is subject to the standard exclusions outlined in Section 46 of the Capital Allowances Act 2001 in relation to First Year Allowances. Certain exclusions are evident, for instance General Exclusion 2 stops an FYA claim being made on expenditure in purchasing a car. Yet some of the additional Exclusions can yield a superior degree of subjectivity.
General Exclusion 6 – Leasing Restriction
Even though a lease is not firmly outlined under tax law, the specific language of General Exclusion 6 Leasing Restrictions is, “the letting of… any other asset on hire is to be regarded as leasing whether or not it would otherwise be so regarded.”
If a group utilises a “PlantCo” or “OpCo” setup, wherein an asset protection company rents or leases its assets (e.g., machinery and plant) to the operating company, they may still be subject to leasing restrictions. In the case of MF Freeman (Plant) Ltd v Jowett (HMIT) [2003], it was determined that the taxpayer was not granted First Year Allowances for capital expenses on machinery and plant that they provided to their subsidiary at an annual fee, as they were providing machinery or plant for the purpose of leasing.
The OpCo & PlantCo structure is commonly employed in the construction industry. However, it is not exclusive to this sector and is frequently used in other industries.
While not all groups may be impacted by the restriction, it is recommended that they explore their tax planning options before making substantial investments. This includes carefully considering the tax implications and any planning opportunities and balancing these with their commercial goals.
With cautious planning, opportunities may arise to assemble such investments, enabling a group to claim Full Expensing or the Annual Investment Allowance on the acquisitions while continually guarding the value of their investments. Nevertheless, the commercial objective of the business ought to take priority above tax planning.
The government has committed to extending to include assets purchased for leasing when fiscal conditions allow.
Planning Opportunities
Financing Acquisition of Plant and Machinery
In order to alleviate cash flow issues or insufficient cash reserves, many businesses opt to acquire plant and machinery through financing arrangements. For example, in the form of a loan (intercompany borrowing or a bank loan). Furthermore, this could take the form of an equipment lease / hire purchase arrangement.
How the asset is funded and who owns it can affect its tax treatment. However, the company’s eligibility for Full Expensing relief may be affected by how the asset is financed. Ensuring that the type of lease over the asset is identified and explicitly whether this is a finance lease, or a hire purchase arrangement is the fundamental area of focus. The tax treatment can differ significantly and ultimately can be summarised as:
| Funding Used | Description | Tax Treatment |
| Finance Lease | At the conclusion of the term, the company will not have ownership of the asset and may be required to return it to the finance company | Annual depreciation and interest charges are deducted over course of agreement (ineligible for Full Expensing) |
| Hire Purchase | The company will fully own the asset once they pay a small fee to buy it at the end of the agreement | Eligible for capital allowances If eligible for Full Expensing claim 100% in year of acquisition |
Deferred Tax Recognition
Claims to Full Expensing will result in companies having to contemplate acknowledging a deferred tax liability on the book value of its qualifying expenditure. This will ultimately affect the company’s net asset position.
Taxpayers must also consider the most efficient way to use their taxable losses, either through a loss carry back claim, group relief or consortium relief, especially now with the main rate of corporation tax amplified from 19% to 25% on 1 April 2023. Therefore, companies must decide if they would:
- use losses in current year or carry back and obtain immediate cash flow benefit; or
- defer to future utilisation and offset against profits charged at a higher rate of tax.
Naturally, the recognition of tax losses as a deferred tax asset and their effective offsetting against a portion or the entirety of the deferred tax liability warrants careful consideration by advisors when considering disclosures for the financial statements.
Drawbacks
Clawback on Disposals
The relief granted on the expenditure for the first-year allowance (excluding special rate expenditure) will be reclaimed in the event of asset disposal, to the extent of any proceeds received. This will result in the generation of a balancing charge. The amount of the balancing charge is relative to the amount of proceeds received.
Claims for Full Expensing will consequently have to be monitored and recorded in a company’s asset register, as any disposal will result in an immediate balancing charge instead of being absorbed by the capital allowance pool.
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