If you're a business owner, you've probably heard the term "full expensing" but may not fully understand what it entails or its benefits. In this blog, we'll explore what full expensing is and how it can help reduce the tax burden on companies by providing tax relief on qualifying investments, ultimately offering both short and long-term benefits for UK businesses.
Full expensing is a game-changer for businesses as it allows them to claim a 100% first-year allowance on qualifying plant and machinery investments, which can reduce their taxable profits by up to 25p.
This tax relief initiative was introduced in Chancellor Jeremy Hunt's 2023 Spring Budget as a replacement for the previous super-deduction and way keep businesses investing in capital assets and boost the UK economy. The benefits of full expensing are not limited to short-term tax savings but also include long-term growth potential, improved competitiveness, and simplified tax compliance.
Initially, full expensing was expected to be available for a three-year period from April 2023 to March 2026. However, in the Autumn Statement 2023, the Chancellor announced that full expensing will now be permanent.
What is full expensing?
Full expensing is a capital allowance tax relief provision that allows businesses to claim a 100% first-year allowance on qualifying plant and machinery investments.
Full expensing explained: How do I qualify?
Full expensing enables businesses to deduct the entire cost of qualifying assets in the year of purchase, rather than spreading the deduction over multiple years, providing valuable tax relief. This allows businesses to claim the full tax deduction for the cost of the asset in the same year that they invest, boosting their profits and driving economic growth.
It is exclusively accessible to companies that are liable to pay Corporation Tax and invest in new plant and machinery on or after 1 April 2023. However, unincorporated businesses, individuals or partnerships can still benefit from a similar relief called the Annual Investment Allowance (AIA), which has a set limit of £1 million. While full expensing is limited to new equipment, second-hand items may still qualify under AIA, such as previously owned vans.
For businesses to be eligible for full expensing, the asset must meet the following criteria:
- Be purchased and used for business purposes
- Qualify for capital allowances under the relevant tax regulations
For qualifying expenditure businesses can claim:
- a 100% first-year allowance for main rate expenditure (full expensing)
- a 50% first-year allowance for special rate expenditure
Full Expensing: Eligible capital assets
It's crucial for businesses to understand which assets qualify for full expensing to ensure they are taking advantage of all available tax relief opportunities. In case a business invests in an asset that is ineligible for full expensing, they may still benefit from other tax relief initiatives such as the earlier mentioned Annual Investment Allowance (AIA).
Generally, full expensing applies to items such as:
| Computer equipment, printers, services | Warehousing and construction equipment |
| Office equipment such as chairs & desks | Non-residential fire alarm & security systems |
| Company vehicles (excluding cars) | Machines such as lathes and planers |
| This is not an exhaustive list, there may be other qualifying assets that are not included here. | |
While electric cars are not eligible for full expensing, businesses may still be able to benefit from a 100% first-year allowance for the cost of a business-related electric vehicle purchase under enhanced capital allowances.
It's important to note that if a company sells an asset on which it has claimed full expensing or the 50% first-year allowance, they must bring in an immediate balancing charge. This charge will be 100% of the disposal value for full expensing, or 50% for the first-year allowance. The remaining balance will then be deducted from the special rate pool balance. It's crucial for businesses to keep this in mind to ensure compliance and avoid any unexpected charges.
What are the benefits of full expensing?
Full expensing aims to motivate businesses to expedite their investment in new capital assets and help drive economic growth by providing tax relief. The OBR predicts an estimated 3.5% increase in business investment in the 2024-25 and 2025-26 tax years as a result of this initiative.
It offers a unique benefit to businesses in that there are no limitations on the amount of expenditure that can be claimed. Essentially, the more you invest in qualifying assets, the more tax relief you can receive.
Full expensing not only provides immediate tax relief in the year of purchase, but also encourages businesses to invest in new technology and equipment, ultimately leading to increased innovation, productivity, and competitiveness. By freeing up cash flow, businesses can allocate funds towards expanding their operations, hiring new employees, or launching new products or services.
Preparing for full expensing of capital allowances
Implementing full expensing can lead to an increase in business investments and growth, benefiting not only the companies but also the economy as a whole.
As a business owner, it's crucial to explore whether your business qualifies for this tax relief initiative and how it can help you achieve long-term success. Full expensing provides an attractive incentive for businesses across different sectors in the UK to invest in plant and machinery. Ensure that you understand how this capital allowance works and how it can maximise your potential savings while positioning your business for sustainable growth.
The DSA Prospect team can guide you on how to make the most of full expensing by ensuring that you meet all the eligibility criteria, comply with regulations, and maintain accurate records to optimise your tax savings. If you are not eligible for full expensing, we can explore alternative tax relief solutions, such as the Annual Investment Allowance, to help you minimise your tax burden.
This blog was updated on: 24/11/2023
This blog was originally published on: 27/03/2023
Disclaimer: The information shared on the DSA Prospect website and social media accounts (inclusive of all content, blogs, communications, graphics, guides and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. DSA Prospect Limited accepts no responsibility for any actions you take, or do not take, based on the information we provide and we always recommend that you speak with qualified professionals where necessary before making any decisions.