Full Expense Deduction for Equipment Purchases

The Spring Budget 2023 introduced a valuable tax break for companies buying equipment and machinery – full expensing, which allows 100% tax relief. But as a deductible expense, it comes with responsibilities.

Full expensing is a temporary measure applying to companies who buy plant or machinery between 1 April 2023 and 31 March 2026. It allows them to claim a 100% capital allowance (CA), HMRC’s equivalent of depreciation, for the cost incurred in the accounting period of purchase. This provides an immediate tax deduction against profits in the year of acquisition.

Importantly, full expensing only applies to corporation tax-paying companies, not sole traders or partnerships. And the purchased items must qualify as plant or machinery used for the company’s trade. This excludes cars, second-hand equipment, assets received as gifts and any plant or machinery bought specifically to lease to another business.

Despite the name, not all expenditures will qualify for a full 100% deduction. “Special rate expenditure”, which includes assets like lifts, electrical systems and long-life equipment (expected to last over 25 years), is only eligible for a 50% first-year allowance (FYA). The remaining cost enters the special rate pool, where companies can claim a 6% writing down allowance (WDA) each year.

Fortunately, companies can choose the most favourable capital allowance when an asset qualifies for more than one type of relief. For example, it may be better to claim the 50% FYA for special rate expenditure instead of full expensing if there is an upcoming disposal.

Full expensing complements the permanent annual investment allowance (AIA) that provides businesses up to £1 million of tax relief each year on qualifying plant and machinery purchases. This means that between the two, companies can potentially write off up to £2 million of equipment costs against taxable profits.

Let’s look at an example. Acom Ltd incurs £2 million expenditure upgrading the electrics in its manufacturing plant. The company can claim a maximum of £1 million AIA, covering half the costs. For the remaining £1 million, Acom Ltd can claim full expensing to get 100% relief in year one. Had the electrical upgrade qualified as a special rate expenditure, the company could have claimed a 50% FYA instead.

While full expensing provides an unbeatable upfront tax deduction, there is a potential clawback of the relief down the road. When an asset on which full expensing was claimed gets disposed of, the proceeds are subject to a balancing charge. This normally equals 100% of the sale price, recouping the tax relief given previously.

For special rate assets where only a 50% FYA was claimed initially, the balancing charge will equal 50% of the disposal proceeds. The remainder will be deducted from the special rate pool balance carried forward. Let’s go back to our example company, Bcom Ltd. Say they sell a piece of plant for £40,000 that originally cost £100,000 and qualified for full expensing. The balancing charge when the asset is disposed of will be £40,000 – the full sale proceeds. Had Bcom Ltd only claimed a 50% FYA, reducing the pool balance to £50,000, the balancing charge would be £20,000, and the pool would have been reduced by the remaining £20,000 proceeds.

This highlights the importance of maintaining detailed records for assets on which full expensing is claimed. Companies must track the initial expenditure, date purchased, allowances claimed and eventual disposal proceeds to calculate balancing charges accurately.

The key is identifying qualifying purchases as capital expenditures separately from other business costs. This enables full expensing claims to be made in the appropriate accounting period and provides the information to handle disposals and balancing charges down the road.

Full expensing offers an unparalleled opportunity for companies to maximise tax relief on qualifying equipment purchases over the next three years. Careful record-keeping and upfront capital expenditure identification are crucial to utilise the relief fully. Any company buying plant or machinery during this window should ensure they take advantage of potentially writing off the full cost against taxable profits.