As of the new tax year, capital allowances, as we know them, are changing. The super-deduction is now a thing of the past, making room for the Government’s latest initiative – full expensing.
Part of Chancellor Jeremy Hunt’s Spring Budget, full expensing is the new scheme to help business investment.
But what does it mean? How will it work? Well, this article will answer those questions in detail.
Out with the old…
From April 2021, companies that invested in qualifying plant and machinery could claim their expenditure back and lower their corporation tax bill.
Originally, your company could claim:
- a 130% super-deduction capital allowance on qualifying main rate plant and machinery investments
- a 50% first-year allowance for qualifying special rate assets.
As per the Government’s criteria, main rate “plant and machinery” includes:
• computer equipment and servers
• tractors, lorries, vans
• ladders, drills, cranes
• office chairs and desks,
• electric vehicle charge points
• refrigeration units
• foundry equipment.
Special rate assets include solar panels, long-life items, thermal insulation and integral building features.
The aim of the super-deduction was to promote and reinvigorate business investment in the fallout of the Covid-19 pandemic. By offering the capital allowance, the Government aimed for economic growth.
Now, though, the system has undergone a significant change after coming to a close as planned on 31 March 2023.
…In with the new
So what is full expensing?
The new scheme aims to continue promoting investment for companies nationwide by allowing them to reclaim 100% of qualifying main rate expenditure in the year they made the purchase.
In practice, that means that for every pound your company invests, your taxes are cut by up to 25p.
The plant and machinery must be new main rate assets, however it cannot be a car or be given to the company as a gift. You also cannot buy the equipment to lease to another party.
Unfortunately, full expensing is only available to limited companies, although the 100% annual investment allowance is open to sole traders and partnerships, albeit capped at £1 million a year.
Just like under the super-deduction, if you buy a special rate asset that complies with all other full expensing rules, you can write off 50% of the cost from your pre-tax profits. Then, you can get written-down allowances to claim 6% off the balance in the subsequent years.
To be eligible for expenses, you must make the purchase on or after 1 April 2023 but before 1 April 2026. During his Budget speech in March, Hunt said the Government intends “to make it permanent as soon as we can responsibly do so”.
Selling an asset
When disposing of an asset bought under full expensing, special rules apply.
If you’ve claimed the whole cost of the equipment, your company will need to bring an ‘immediate balancing charge’ equal to 100% of the disposal value. For example, if you sell an asset for £10,000 and have already claimed the cost back through full expensing, you must increase your taxable profits by £10,000.
The same rule apples for special rate assets, expect that the immediate balancing charge should be equal to 50% of the disposal value. So, if you sell an asset for £10,000 that you had claimed the 50% first-year allowance on, you must increase your taxable profits by £5,000.
How to claim
Like with any capital allowances, you must claim the costs of your eligible plant and machinery equipment in your corporation tax return for the relevant year.
If you’ve never had to claim capital allowances before or you’re unsure how full expensing will work, your accountant will happily talk you through it. Or, better yet, do it for you.
As an accounting firm with years of experience dealing with corporate tax returns and investments, we’ll help you claim any eligible costs. Get in touch to discuss your company’s investments.