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Full expensing for companies – the end of capital allowances complexity?

With the announcement of permanent full expensing for capital expenditure on plant and machinery from 1 April 2023, and the continuation of the £1m Annual Investment Allowance (‘AIA’), companies may be under the impression that capital allowances complexity is a thing of the past.  However, there are still a surprising number of rules and pitfalls, together with important choices around which allowances to claim and a significant amount of record keeping.

The plant and machinery 130% super deduction scheme ended on 31 March 2023 and its replacement, full expensing, is a welcome boost for large businesses with annual company or group capital expenditure above the £1m AIA limit.  However there are a number of important exceptions to what can be fully expensed.  Full expensing is only available for main pool assets and therefore excludes buildings and structures, fixtures, integral features and cars.  Assets that would normally go into the special rate pool, including electrical, water, heating and ventilation systems, other fixtures and long life assets, can now benefit from 50% initial expensing.  The remainder of the expenditure is taken to the special rate pool where a 6% writing down allowance is available.  Other than the limit to the initial deduction, the 50% first year allowance scheme has very similar rules and exceptions to full expensing.  For both reliefs, the assets must be unused and not second hand, as the reliefs are intended to stimulate spending on new technology.  With some exceptions, items that are leased or rented out are excluded.

These allowances must be claimed in the year of expenditure.  On a subsequent disposal, proceeds from the sale of fully expensed plant are not deducted from the main capital allowances pool and so generate an immediate balancing charge.  On the disposal of special rate items, 50% of proceeds can be put to the special rate pool but the rest gives an immediate balancing charge.  To follow these rules, companies must keep a record of the assets that have had these tax reliefs.

Conversely, the AIA is available on both new and used assets and gives 100% relief for expenditure on main pool plant and machinery and special rate assets.  Again, cars, buildings and structures are excluded.  One AIA must be shared between grouped companies and, potentially, those under common control and so connected companies must agree the optimal allocation between themselves. On disposal, sale proceeds are either allocated to the main plant and machinery pool or the special rate pool depending on the type of asset.  With these advantages compared to expensing reliefs, the AIA is likely to be the first choice for companies considering which allowances to claim, and particularly targeted towards special rate and second hand assets.

Vans can qualify for full expensing, the AIA or a 100% first year allowance depending on whether they are bought new and their CO2 emission levels.  Cars acquired for business use also have a variety of allowances available.  Electric cars and those with zero CO2 emissions, purchased new, are eligible for a 100% first year allowance.  Other new and second hand cars with CO2 emissions below 50g/km can obtain an 18% writing allowance within the main capital allowances pool.  Those with higher emissions are put into the special rate pool, at a 6% writing down allowance.

Buildings and structures have their own rules.   From 2018, new expenditure to construct or renovate buildings and structures not used as dwellings has qualified for a 3% straight line allowance.  Subsequent owners can inherit the remainder of the allowance if the building continues to be used for qualifying activities.  Expenditure on buildings and plant used for research and development can qualify for 100% research and development allowances, which can greatly accelerate tax relief for the shell of the building.

In summary, capital expenditure must still be carefully analysed into the different types of qualifying assets, also considering whether the assets are new or used.  The asset’s planned use, who it has been purchased from and its likely disposal value may also be factors in determining which allowances can or should be claimed.  With careful application of the rules, companies can receive a considerable cash flow benefit from these valuable reliefs.

If you have any questions, please do not hesitate to get in touch.