Full Expensing & The Annual Investment Allowance – Business Tax Incentives

In the Spring 2023 Budget, the UK Government launched Full Capital Expensing, a new business tax incentive. Alongside the Annual Investment Allowance, these Capital Allowances enable firms to reduce their Corporation Tax if they invest in their businesses.

Full Expensing Launched

What is Full Expensing?

The UK Government has announced a generous new business tax incentive called Full Expensing. For 3 years from April 2023, businesses can receive 100% first year capital allowances on business purchases, which are broadly termed plant and machinery but cover an array of business equipment. Full Expensing is a replacement for the Super-deduction which ended on 31st March.

Whilst Corporation Tax rose from 19% to 25% on 1st April 2023, this investment allowance is designed to offset a proportion of that increase, lowering the effective tax rate, encouraging businesses to adapt, expand and grow.

This incentive allows companies to fully write off the cost of their investment in the year the asset was purchased. The company gets up to 25% in tax cuts against the value of the asset being bought. The value of the new asset is deducted from company profits before the calculation for Corporation Tax, allowing the business to avoid paying tax on the equivalent value of company profits.

For example, a business buying £40,000 of qualifying equipment and a £30,000 delivery van would deduct £70,000 from their company profits and pay Corporation Tax on the remainder. At a 25% Corporation Tax rate, the company would now pay £17,500 less tax, a saving equivalent to 25% of the original purchase price.

Portman is able to provide both Business Loans and Hire Purchase agreements, funding options that qualify for Capital Allowances. Take a look at our Equipment Finance page to find out more.

What Are Capital Allowances?

Capital allowances refer to a form of business tax relief, allowing businesses to reduce the value of their profits by the cost of qualifying assets, thus allowing them to pay less Corporation Tax.

Alongside Full Expensing there are other pre-existing capital allowances, such as the Annual Investment Allowance (AIA), Writing Down Allowances (WDAs), First-Year Allowances (FYAs), and Structures and Buildings Allowances (SBAs).

Capital allowances enable businesses to reduce their tax liability, whilst boosting their future potential.

For more information, take a look at the government website, and consult your tax accountant.

Claiming the Full Expensing Allowance

Full Expensing can be claimed by incorporated businesses that are subject to Corporation Tax, on purchases of new/unused equipment after 1st April 2023. Unincorporated businesses need to claim the Annual Investment Allowance instead.

Capital allowances such as Full Expensing and the Annual Investment Allowance are claimed on your tax return.

Full Expensing can be claimed on a wide variety of business assets, as per the Annual Investment Allowance, but it cannot be claimed on cars. ‘Special rate’ items that do not qualify for the full incentive can claim a 50% allowance instead.

If a business subsequently sells an asset, on which they have claimed Full Expensing either at the full 100% or 50% rate, then they will need to pay a balancing charge to HMRC. This means increasing their taxable profits by the relevant 50% or 100% of the original purchase price and paying Corporation Tax on the larger amount.

Purchases covered by Full Expensing and the Annual Investment Allowance

Capital Allowances are applicable to what is broadly termed ‘Plant and Machinery’. This actually covers a wide range of business expenditure and equipment:

  • Items that you keep, to use in your business.
  • Costs of demolishing plant and machinery.
  • Parts of a building considered integral.
  • Some fixtures, including air-con, kitchens and bathrooms, and alarm/cctv systems.
  • Building alterations required to install plant and machinery.
  • Vehicles for moving goods, but not business cars.
  • Items must be new and unused.

You cannot claim Full Expensing or Annual Investment Allowances for:

  • Items you lease – you must have a Hire Purchase Agreement in place, be using a Business Loan to buy the equipment or have purchased the item outright.
  • Items used only for entertainment.
  • Land, structures, buildings or utilities.
  • Cars (but vehicles for moving goods are permitted).

It’s also worth noting that if the item is sold after claiming Full Expensing or AIA tax relief, this may trigger a balancing charge from HMRC.

For the most up-to-date information as to what you can claim capital allowances on, consult the .gov website.

What is the Annual Investment Allowance (AIA)?

The Annual Investment Allowance permits a business to deduct the full cost of a qualifying items when calculating taxable profits, as long as the remaining Annual Investment Allowance is sufficient (i.e. the full £1m has not been claimed yet) and the asset is a qualifying expenditure (see list above). It was introduced in 2008 to encourage businesses to invest, allowing firms to claim the full tax allowance in the first year of purchase.

The AIA can be claimed by all businesses; limited companies, partnerships and sole traders. Sole traders and partnerships with an income of £150,000 per year or less can also choose to claim the AIA through a simpler accounting system called ‘cash basis’.

For small businesses not applying the cash accounting basis, the Annual Investment Allowance provides 100% first-year relief for plant and machinery investments. From April 2023, this will be permanently set at expenditure claims totalling up to £1 million.

The Annual Investment Allowance can be claimed on what is loosely termed ‘plant and machinery’. This actually covers a huge range of business expenditure as listed earlier.

Find full information on the Annual Investment Allowance on the government website.

We always recommend seeking advice from a qualified Tax Accountant before making large investments and completing your annual tax return.

Equipment on Hire Purchase may qualify for Capital Allowances

Finance With Hire Purchase