A Guide to Full Expensing for Business Owners

As leading chartered accountants and tax advisors in Surrey, the team at Hamlyns has been closely tracking the evolution of the UK’s capital allowances framework – a critical consideration for businesses when planning strategic investments.

The latest significant development in this domain is the introduction of “full expensing”, a permanent first-year tax relief measure that provides a 100% deduction on qualifying plant and machinery.

Replacing the previous “super deduction” initiative, full expensing represents an even more generous incentive for companies to invest in assets that drive growth. By enabling the entire cost of eligible capital expenditures to be written off against taxable profits in the first year, it delivers a substantial cash flow boost and tax savings for businesses.

In this guide, we’ll dive into the mechanics of full expensing, its benefits, key eligibility criteria, and how it compares to other capital allowances – arming you with the knowledge to maximise this powerful tax relief opportunity.

Introducing Full Expensing

Announced in the 2023 Autumn Statement and made permanent in the 2024 Spring Budget, full expensing is the latest evolution of the UK’s capital allowances landscape. It builds upon the previously introduced “super deduction” scheme, which offered a 130% first-year relief for qualifying plant and machinery investments.

Under full expensing rules, businesses subject to UK corporation tax can now deduct 100% of the cost of eligible capital expenditure in the same year the asset is acquired and put into use. This immediate 100% write-off contrasts with the previous system of writing down allowances (WDAs), where relief was spread over multiple years.

The scope of assets covered is broad, spanning categories like manufacturing equipment, office furniture, construction machinery, agricultural tools, IT systems, warehouse equipment and more.

Requirements and Differences to the AIA

The key requirement is that the items must be brand new and unused. As such, second-hand purchases or leased assets do not qualify for full expensing but may qualify for the Annual Investment Allowance (AIA) scheme.

Unlike the £1 million AIA limit, full expensing has no upper cap on the amount of qualifying expenditure a business can claim. It is, however, only available for incorporated businesses, and thus partnerships, sole traders and unincorporated companies can only use the AIA. This makes it an especially potent tax-saving measure for larger capital projects and high-value asset acquisitions.

Benefits of Full Expensing

The primary advantages of full expensing for UK businesses can be summarised as follows:

  • Immediate tax savings: By allowing 100% of the cost of qualifying investments to be deducted against taxable profits in the first year, full expensing delivers a significant upfront reduction in a company’s corporation tax liability. This immediately frees up critical cash flow for reinvestment or other operational needs.
  • Accelerated depreciation: Rather than depreciating assets over their useful life through traditional WDAs, full expensing frontloads the tax relief, aligning more closely with the actual economic depreciation of capital equipment. This enhances the present-day value of the tax deduction.
  • Incentivised investment: The generous 100% first-year relief, combined with no upper limit, acts as a powerful stimulus for businesses to ramp up capital expenditures. This, in turn, boosts productivity, efficiency, and growth potential across the UK economy, which was ostensibly the impetus behind the scheme in the first place.
  • Simplified compliance: Compared to the often-complex claiming process for other capital allowances, full expensing offers a straightforward mechanism to obtain substantial tax benefits. This minimises the administrative burden on companies.

Eligibility Criteria and Limitations

To qualify for full expensing, businesses must satisfy the following key criteria:

  • Asset type: The deduction applies only to new and unused plant and machinery assets. This includes a wide range of equipment as listed above but does not include cars.
  • Ownership: The claiming company must own the purchased assets. Leased or gifted items are not eligible for the 100% first-year allowance, although they may still qualify for the AIA.
  • Timing: The capital expenditure must be incurred within the current corporation tax accounting period to claim the full expensing deduction in that year. Expenses from prior or future periods are ineligible.

It’s worth noting that a 50% first-year allowance continues to be available for “special rate” plant and machinery assets like integral building features like air conditioning systems, escalators, lifts, thermal insulation, solar panels, and long-life (25+ year) assets. This provides an additional relief avenue for certain types of qualifying investments.

Maximising Your Tax Savings

When planning strategic capital projects, business owners must carefully evaluate the various capital allowances to optimise their tax position. While full expensing offers the most generous first-year relief, the AIA may be preferable in some cases – especially for lower-value, second-hand, or leased assets.

Hamlyns’ tax advisory experts can help you navigate this landscape, identifying the most advantageous opportunities and calculating the precise tax impact of your proposed investments. By proactively incorporating full expensing into your financial modelling and budgeting, you can unlock significant cash flow improvements to fund your business growth.

Moreover, our chartered accountants can guide you through the administrative aspects of claiming full expensing relief, ensuring full compliance with HMRC requirements. This eliminates the risk of errors or oversights that could jeopardise your tax benefits down the line.

Long-Term Planning for Business Owners: Next Steps

The UK government’s decision to make full expensing a permanent capital allowance scheme demonstrates its commitment to incentivising business investment and unlocking productivity-enhancing growth. As leading tax advisors and chartered accountants, Hamlyns welcomes this development, which provides our clients with enhanced strategic flexibility and cash optimisation opportunities.

Our professional accounting and tax advisory team stands ready to help you unlock the full potential of this powerful tax relief measure – delivering tangible improvements to your bottom line and positioning your business for long-term success.

Reach out to the Hamlyns tax advisory experts today to discuss your upcoming capital projects and how we can help you maximise your potential returns and savings with full expensing.

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