Understanding Full Expensing

By Graham | May 6, 2023

Full expensing is a tax relief scheme that allows companies to claim 100% of the cost of qualifying plant and machinery all in one go. This tax incentive was introduced in the Spring Budget 2023 and runs from 01 April 2023 to 31 March 2026.

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Why Full Expensing Matters

This tax relief measure encourages UK businesses to invest more in modern plant, tools, machinery, and technology, potentially saving up to 25p for every £1 spent on eligible assets. In 2021, UK business investment accounted for 10.0% of GDP compared to an average of 12.5% among overseas competitors.

How Full Expensing Works

Full expensing allows UK companies to deduct the full cost of new and unused plant and machinery from their taxable profits in the year of purchase. This scheme replaces the super-deduction capital allowance, which expired on 31 March 2023. With full expensing, companies can write off 100% of the investment cost in qualifying plant and machinery in one go.

Eligible Equipment

Examples of qualifying plant and machinery include, but are not limited to:

Warehousing equipment such as forklift trucks
Tools like ladders and drills
Construction equipment such as bulldozers and excavators
Machines like computers and printers
Vehicles like tractors, lorries, and vans
Office equipment, such as chairs and desks
Some fixtures, like kitchen and bathroom fittings
Fire alarm systems

Full Expensing vs Super-Deduction

Full expensing replaces the super-deduction capital allowance, which allowed companies to deduct 130% of the cost of capital expenses in the year they occurred. Full expensing is less generous, limited to only 100% of the cost of the purchased assets.

Eligibility Criteria

Full expensing is only available to incorporated businesses that pay corporation tax. Sole traders, partnerships, and LLPs are not eligible. However, non-eligible businesses can still claim the Annual Investment Allowance (AIA), which offers the same benefits as full expensing for investments up to £1 million per year.

Disposal of Assets

When a company sells an asset on which it has claimed full expensing, it must bring in an immediate balancing charge equal to 100% of the disposal value. This means that if the company sold an asset for £10,000 on which they had claimed full expensing, they would be required to increase their taxable profits by a matching £10,000.

Other Capital Allowances

In addition to full expensing, businesses may utilize other forms of capital allowance. These options include:

Annual Investment Allowance (AIA)
Writing Down Allowances (WDA)
First-Year Allowances (FYA)
Structures and Buildings Allowances (SBA)

Navigating Losses or Low Profits

If the value of the assets you have bought is higher than your profits, or you have zero profits because you have made a loss, you can set part of the asset cost against whatever profits you have. The balance of the asset’s value can then be rolled over and set against profits, using full expensing, in the next tax year or any tax year until the scheme ends in March 2026. The government may consider making full expensing permanent at a later stage and before the expiry point.

Restrictions on Finance Leases and Hire Purchase

Special capital allowance rules relate to assets acquired on hire purchase or finance leases. With equipment bought using asset finance or similar business loans, these assets are generally treated as belonging to the business using them, even though legal ownership may not pass until final payment is made at the end of the contract term. Any interest on hire purchase items is a revenue (trading) expense, not part of the capital expenditure, and cannot be claimed back with full expensing.

Full Expensing Example

A company has gross annual profits of £10 million in the 2023-24 tax year. Instead of paying corporation tax of £2,500,000 on this sum, the business invests in a new state-of-the-art production line, spending £10 million on various items of main rate plant and machinery. The company can claim £10 million under full expensing in the year the expenditure is incurred. They deduct the whole sum from their gross profits, reducing their corporation tax bill to zero. The £2,500,000 they would have paid in tax is now set against the cost of the production line, reducing the real expense by 25% to £7,500,000.

Frequently Asked Questions (FAQs): Full Expensing in the UK

1. What is full expensing? Full expensing is a capital allowance tax scheme that allows UK companies to deduct 100% of the cost of qualifying plant and machinery from their taxable profits in the year of purchase instead of spreading the cost across multiple tax years.

2. How does full expensing work? Full expensing allows companies to write off the entire cost of new and unused plant and machinery in the year of purchase, providing a tax saving of up to 25p for every £1 spent on qualifying assets.

3. Who is eligible for full expensing? Full expensing is available to incorporated businesses that pay corporation tax in the UK. Sole traders, partnerships, and LLPs are not eligible for full expensing but can utilise other capital allowances, such as the Annual Investment Allowance (AIA).

4. What types of assets qualify for full expensing? Qualifying plant and machinery include warehouse equipment, tools, construction equipment, machines, vehicles, office equipment, fixtures, and fire alarm systems.

5. How does full expensing differ from the super-deduction? Full expensing replaces the super-deduction and allows companies to deduct 100% of the cost of capital expenses in the year they occur, while the super-deduction allowed companies to deduct 130% of the cost.

6. What if my profits are too low or I’ve made a loss? If your profits are too low or you’ve made a loss, you can set part of the asset cost against your profits using full expensing. The remaining value of the asset can be rolled over and set against profits in the next tax year or any tax year until the scheme ends in March 2026.

7. What happens if I sell the assets? If you sell an asset on which you claimed full expensing, you must bring in an immediate balancing charge equal to 100% of the disposal value. This means that the company must increase its taxable profits by a matching amount.

8. What other capital allowances exist in the UK? Other capital allowances include the Annual Investment Allowance (AIA), Writing Down Allowances (WDA), First-Year Allowances (FYA), and Structures and Buildings Allowances (SBA).

9. How can I learn more about full expensing and get help with my tax planning? Contact a professional accountant, such as Mercian Accountants, for expert advice and assistance in navigating the complexities of capital allowances and tax relief schemes like full expensing.

Maximise Your Savings with Full Expensing and Mercian Accountants

Are you ready to capitalise on the full expensing tax relief scheme? Let Mercian Accountants guide you through the process and ensure you maximise your investment in plant and machinery. Our team of experts will help you navigate the complexities of capital allowances and tax relief to maximise your savings and support your business growth.

Don’t miss out on the opportunity to reduce your tax bill and invest in the equipment you need to succeed. Contact Mercian Accountants today and let us help you take full advantage of the full expensing scheme.

Get in touch with Mercian Accountants now to start saving!