With the new tax year now underway, we catch up with John Farquharson, our Head of Finance, on the end of super-deduction on capital allowances and what the new tax incentive referred to as “full-expensing” means for businesses in 2023.
What was the super-deduction on capital allowance?
As part of then-chancellor Rushi Sunak’s Budget in April 2021, the Government announced a super-deduction capital allowance scheme along with a raft of other measures to boost investment in the economy. It was designed to encourage eligible companies to invest quickly, raising demand for plant and machinery while also improving productivity and competitiveness of UK companies by offering a 130% deduction for main rate expenditure and a 50% deduction for special rate expenditure
Under the scheme, a business which had been planning on acquiring eligible plant and machinery before March 2023 could have seen some special tax advantage, and if the assets were acquired through Hire Purchase, then there could have been some cashflow benefits as well. At a high level, under the super-deduction, for every pound a company had invested, taxes could have been cut by up to 25p.
The super-deduction, however, expired on 31 March 2023.
What happens now?
A number of measures to stimulate economic growth through investment were mentioned in this year’s Budget in March 2023, and the one that directly follows on from the super-deduction is something called “full-expensing”.
Full-expensing means that a 100% first year allowance will be available on the acquisition of most plant and machinery, with no cap on the amount of expenditure that will qualify for the relief. With the increase in the corporation tax rate to 25%, this means that companies will continue to have taxes reduced by 25p for every pound invested in eligible assets.
In addition to boosting investment in the UK, the scheme could have positive effects on the economy in the long run: with more investment comes more innovation, competitiveness and productivity which can help boost higher wages, employment rates and business growth.
What are the new rules?
All of the following must apply before the relief can be claimed, and it only applies to companies subject to corporation tax, so sole traders or any form of partnerships are excluded (but they may be eligible for the Annual Investment Allowance on plant and machinery which offers the same benefits as full-expensing for investments up to £1m per year):
- The expenditure must be incurred between 1 April 2023 and 31 March 2026.
- The expenditure must be on qualifying plant and machinery.
- To qualify, plant and machinery must be bought new and unused, second hand assets do not qualify.
- To qualify, plant and machinery must be bought to be used in the business and not be held for leasing/rental to customers.
HMRC considers most tangible capital assets (apart from land and building) used in the course of a business to be plant and machinery for the purposes of full-expensing.
There is not an exhaustive list of eligible plant and machinery assets but the kind of assets which may qualify include:
- machines such as computers, printers, lathes, and planers
- office equipment such as desks and chairs
- vehicles such as vans, lorries, and tractors
- warehousing equipment such as forklift trucks, pallet trucks, shelving, and stackers
- tools such as ladders and drills
- construction equipment such as excavators, compactors, and bulldozers
- some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property
- but NOT cars, nor any assets that have been gifted to the company.
Are there any restrictions of how these assets can be funded?
Companies can still qualify for full-expensing if they use a finance agreement if they opt for a hire purchase agreement but not under lease financing. Business owners looking to invest in plant and machinery in the next couple of years could therefore benefit from both the scheme and an Asset Finance facility to save on tax and further boost their cashflow by eliminating the need for hefty deposits. Tax specialists such as accountants or advisers can provide more information on the eligibility criteria and compliance requirements, and our team of funding experts can tailor a solution that fits the unique requirements of businesses to help them keep moving and meet their ambitions.