‘Full Expensing’ bonus in the Spring Budget 2023

By Mike Chapman, Knill James Tax Partner

While a good many of the proposals in Jeremy Hunt's second outing as Chancellor were trailed in advance, there was an unexpected fillip in the introduction of a capital allowances provision to be known as 'Full Expensing'.

In an attempt to counteract the traditionally low level of capital investment in the UK, Full Expensing permits companies a 100% deduction for all expenditure incurred on certain items of plant and machinery for a three year period until 31 March 2026. Given the increase in headline Corporation Tax rates from 1 April and the demise of the Capital Allowances 130% 'Super-deduction' on the same date, this break for companies is very timely and has probably been made possible by better-than-expected economic forecasts.

At first sight this appears to be a simple repackaging of the Super-deduction with the same conditions attaching:

• It is only available to companies, not partnerships or sole traders
• The expenditure must be on certain plant and machinery which is new and unused
• It is not available for 'special rate' assets which includes expenditure on items such as solar panels, general electrical fittings and thermal insulation of buildings
• Expenditure on cars and on assets acquired to lease out does not qualify

For new and unused assets which are classified as 'special rate' there remains the 50% deduction that was introduced at the same time as the Super-deduction. For most SMEs, the 50% rate will be academic as the Capital Allowances Annual Investment Allowance (AIA), now confirmed at £1m per annum, will be sufficient to absorb most SME's expenditure on special rate assets to provide a 100% deduction with the balance of the AIA and the Full Expensing regime available to provide a full tax write-down on most other qualifying expenditure. The AIA alone is available to unincorporated businesses.

Where however there is a subsequent disposal of an asset on which the Full Expensing 100% or 50% allowance has been claimed, either all or half, respectively, of the sales proceeds received will create a balancing charge on which Corporation Tax will be payable. The HM Treasury Press Release on the subject talks of an 'immediate' charge on such disposals, though whether this is clumsy drafting or not can only be determined once the draft legislation is available.

So, 'Full Expensing' will probably only be beneficial to larger companies, but will nevertheless act as a welcome corrective to the imminent increase in Corporation Tax rates from 19% to 25%.