Capital Allowances – Full Expensing & 50% First Year Allowances from 1 April 2023

In the Spring Budget 2023, the Chancellor introduced “Full Expensing” and 50% First Year Allowances (FYAs) to replace the Super Deduction.

The Super Deduction ran from 1 April 2021 to 31 March 2023. Full Expensing and 50% FYAs will run from 1 April 2023 to 31 March 2026.

A decision will then be taken on whether to extend it further.

Qualifying Expenditure

The conditions for Full Expensing are the same as those for the Super Deduction.

• The asset must be new and unused.
• The asset must not be used for leasing or hiring out to other persons (but see below for important exceptions for property lessors).
• Cars do not qualify. Note however that new cars with zero CO2 emissions qualify for 100% First Year Allowances until 31 March 2025.

Full Expensing (100%) vs 50% FYAs

Plant and machinery is divided into two categories: main rate and special rate. Only main rate expenditure qualifies for the full 100% allowance. Special rate expenditure qualifies for 50% but note that 100% Annual Allowances may be available instead (see further below).

The table below sets out the types of expenditure which fall within each category: 

Special Rate Expenditure

Special Rate Expenditure qualifies for a 50% first year allowance in the year of expenditure. The balance of expenditure attracts writing down allowances at 6% pa on a reducing balance basis, starting in the accounting period following the period in which the FYA is given.

Property Investors PropCo/OpCo Structures, and Leasing as Part of a Service

Full Expensing and 50% FYAs are not available on assets to companies that lease or hire out the asset to other persons. There are two important exceptions to this rule:

1. Leasing as a service: the provision of an asset with an operator (e.g. a crane with a crane driver) is not treated as leasing. If it was intended that the asset be predominantly provided with an operator, it should qualify for full expensing.
2. Property letting: allowances are available on “background plant and machinery” forming part of a building. There is a wide overlap between “background plant and machinery” and “integral features” but they are not exactly the same, and includes, for example, computer network and telephony installations. Full expensing or 50% FYAs will apply depending on the type of expenditure. Please get in touch with us if further information is needed on this point.

Disposals

Where a company sells an asset on which 100% or 50% FYAs have been claimed, the company will be charged to tax on the full disposal proceeds as a balancing charge.

Annual Investment Allowance (AIA)

The Annual Investment Allowance is available to all types of businesses: limited companies, partnerships, limited liability partnerships (LLPs) and sole traders or freelancers.

100% AIAs are given on both main rate expenditure and special rate expenditure. It will often be preferable to claim AIAs where the first-year allowance is 50%;

AIAs are available on second-hand expenditure as well as new.

The main limitation on AIAs is the £1 million annual cap on expenditure. Groups of companies must share the AIA between group members but can allocate it in any way they choose. Companies under common control must normally share the AIA if they share business premises or carry on a similar trade (i..e within the same NACE classification).

Where assets are sold, the disposal proceeds are deducted from the pool of expenditure. This will reduce future writing down allowances or may create a balancing charge, but the treatment is generally less harsh than the Full Expensing rule. Accordingly, companies may wish to claim AIAs in priority to Full Expensing.