Capital allowances: Exploring the new incentives

From April 2023 until at least the end of March 2026, companies can claim 100% capital allowances on qualifying plant and machinery investments through the recently announced full expensing relief. 

In order to incentivise business investment and fill the void left by the removal of the super deduction in March 2023, ‘full capital expensing’ has come into effect for at least the next three years.

This will mean that businesses will receive up to 25p of tax relief for every £1 invested into qualifying main pool assets (IT equipment, plant or machinery).

Firstly, what are capital allowances?
Capital allowances are a type of tax relief for businesses. They let a business deduct some or all of the cost of an item from its profits before paying tax. There are different types of capital allowance, including:

  • Annual Investment Allowance (AIA) – allows businesses to claim 100% of the cost of plant and machinery up to £1m in the year it is incurred
  • Writing Down Allowances (WDAs) – spread the tax deductions over time at 18% and 6% a year for main rate and special rate expenditure respectively
  • First-Year Allowances (FYAs) – allow a company to claim a percentage of the cost of plant and machinery investments in the year it is incurred.
  • Structures and Buildings Allowances (SBAs) – allow a business to deduct 3% per year over 33 1/3 years for qualifying expenditure on non-residential structures and buildings.

A summary of the new incentives 
As a result of measures announced in the Spring Budget 2023, businesses will now benefit from:

  • Full expensing – which offers 100% first-year relief to companies on qualifying new main rate plant and machinery investments from 1 April 2023 until 31 March 2026
  • The 50% First-Year Allowance (FYA) for expenditure by companies on new special rate (including long life) assets until 31 March 2026

Also, as previously announced, the Annual Investment Allowance (AIA), which provides 100% first-year relief for plant and machinery investments up to £1 million, is available for all businesses including unincorporated businesses and most partnerships.

Why is the Government introducing full expensing?
Full expensing builds on the super deduction, allowing companies to write off 100% of the cost of investment in one go.

In the Government’s capital allowances regime consultation last year, it was noted that businesses showed a clear preference for full expensing over the other options under consideration. The preference was based on its assumed simplicity and apparent generosity.

How does full expensing work?
Full expensing is a 100% first-year allowance which allows companies to claim a deduction from taxable profits that is equal to 100% of their qualifying expenditure in the year that expenditure is incurred.

Expenditure must be incurred on the provision of “main rate” plant or machinery on or after 1 April 2023 but before 1 April 2026.

Full expensing is available to companies subject to Corporation Tax only. Therefore, unincorporated businesses cannot claim, but such businesses are entitled to claim the AIA which offers the same benefits as full expensing for the investments it covers (up to £1 million per year).

The plant and machinery must be new and unused, must not be a car, given to the company as a gift, or bought to lease to someone else.

Expenditure on second-hand assets and those bought to lease to someone else can still qualify for the AIA.

For “special rate” expenditure (typically integral features such as lighting, electrical systems and HVAC), which doesn’t qualify for full expensing, a 50% first-year allowance can be claimed instead, subject to the same conditions that apply for full expensing.

This means that a company can claim a deduction from taxable profits that is equal to 50% of their qualifying expenditure in the year that expenditure is incurred. Capital allowances can be claimed on the balance of expenditure in subsequent accounting periods at the 6% rate of WDAs for special rate expenditure.