29 Mar 2023

Full expensing: old relief in new clothes

Insights, Publications

The recent Budget (i.e. Spring Budget 2023) introduced what was described as ‘full expensing’ of qualifying capital expenditure on plant and machinery incurred over the three years starting on 1 April 2023.  Alongside ‘full expensing’ (meaning full write-off against tax in the first year) for most expenditure there is 50% relief (which might have been, but wasn’t, styled ‘half expensing’) for ‘special rate’ expenditure (mainly long-life assets and things like lifts and HVAC in buildings).

Despite its novel nomenclature, this is in fact nothing more or less than a continuation of the temporary first-year allowance which has been available to companies since 1 April 2021, albeit that the 30% ‘super-deduction’ uplift is now removed.  With the increase to 25% of the mainstream Corporation Tax rate, the removal is logical: the cash value of tax relief at 25% on 100% of expenditure is the same, more or less, as that of tax relief at 19% on 130% of expenditure.

Relief under the new rules will be subject to the same restrictions (‘General Exclusions’) as apply to first-year allowances generally.  It will not, for example, be available in respect of capital expenditure on motor cars (though a separate provision giving 100% first-year allowance in respect of electric cars continues in force until 31 March 2025).

Another of the ‘General Exclusions’ relates to expenditure on the provision of assets for leasing or letting on hire.  Such expenditure did not qualify under the previous rules and will not qualify under the new ones either.  However, full write-off of such expenditure against tax may be available under the ‘Annual Investment Allowance’ rules  – now continued indefinitely but restricted to a maximum of £1m per year.

The old rules relaxed the exclusion for leased assets inasmuch as relief was available for leasing ‘background plant or machinery’ in a building – that is, broadly, where a let building included the equipment necessary for its functionality.  One assumes that the same relaxation will apply under the new rules.

However, one problem does remain unaddressed.  In some groups of companies, it is the practice, for very sound commercial reasons, for substantial items of plant to be owned by one subsidiary and leased out to operating subsidiaries.  Such an arrangement will preclude ‘full expensing’.  One solution is for the plant-owning company to provide an operative along with the plant; HMRC accept that this is the provision of services rather than mere hire and that first-year allowance is therefore not precluded.

For more information, please get in touch with your usual BKL contact or use our enquiry form.