Full expensing versus the Annual Investment Allowance.
Many companies will be starting to think about ‘full expensing’, which was temporarily introduced at the 2023 Spring Budget and made ‘permanent’ in the 2023 Autumn Statement. To recap, ‘full expensing’ provides a 100% first-year capital allowance for qualifying main pool expenditure and 50% first-year allowance for special rate pool expenditure (e.g. integral features). The rules apply to expenditure incurred on or after 1 April 2023, and will therefore be a consideration for companies currently preparing their 2023 or 2024 corporation tax returns.
The simplicity of the full expensing regime (which is uncapped) may lead companies to think this is the default option going forward, but are they forgetting something?
An old friend – the Annual Investment Allowance (AIA): The AIA has been around since 2008 and allows companies to claim 100% relief on most plant and machinery, up to the AIA limit. The limit was increased from £200,000 to £1m per group in 2019 and therefore covers the majority of expenditure that small to medium sized companies typically make in a single year.
However, the AIA’s limelight was somewhat stolen by the introduction of the ‘super-deduction’ in 2021. The super-deduction gave up to 130% relief on qualifying assets acquired between 1 April 2021 and 31 March 2023, and was introduced to ensure that companies were not delaying their capital expenditure until after 1 April 2023, i.e. the date on which the main rate of corporation tax rate increased from 19% to 25%.
With the super-deduction being replaced by full expensing from 1 April 2023, companies might assume that they should follow the same approach.
However, although relief under full expensing is uncapped, it is generally preferable to claim the AIA in priority. This is for two reasons:
The AIA provides 100% relief in the year of expenditure on Special Rate Pool assets. By contrast, full expensing provides 50% relief in the first year with the balance added to the Special Rate Pool, which is then subject to Writing Down Allowances, currently at a rate of only 6% per annum.
Disposals of plant and machinery, for which full expensing has been claimed, will be subject to an immediate balancing charge (i.e. a taxable receipt) based on the proceeds received. Balancing charges do not apply to assets acquired using the AIA.
Example: Clarkson Farms Ltd has an existing capital allowances main pool balance of £500,000 and acquires a tractor for £150,000. The tractor is sold the following year for £100,000.
If full expensing is claimed, the company gets relief for the £150,000 in period 1, but faces a balancing charge in period 2 of £100,000, i.e. £50,000 of relief has been obtained.
If the AIA is claimed, the company still gets the £150,000 relief in period 1, but in period 2 there is no balancing charge. Instead, the £100,000 is deducted from the capital allowances main pool. This reduces the amount of writing down allowances the company gets, but only by £18,000. Claiming the AIA in this example saves £82,000.
This is only a timing difference, as the first option leaves the capital allowances pool at the higher level of £500,000. However, with writing down allowances applying at 18%, it will take several years for the saving to unwind.
Our view: Many companies will have claimed the super-deduction over the last few years and may overlook the existing AIA rules following the introduction of full expensing, not realising the impact if they come to sell assets. In our view, the AIA is a better option, particularly where there are large brought forward capital allowance pools.
Full expensing versus the Annual Investment Allowance.
Many companies will be starting to think about ‘full expensing’, which was temporarily introduced at the 2023 Spring Budget and made ‘permanent’ in the 2023 Autumn Statement. To recap, ‘full expensing’ provides a 100% first-year capital allowance for qualifying main pool expenditure and 50% first-year allowance for special rate pool expenditure (e.g. integral features). The rules apply to expenditure incurred on or after 1 April 2023, and will therefore be a consideration for companies currently preparing their 2023 or 2024 corporation tax returns.
The simplicity of the full expensing regime (which is uncapped) may lead companies to think this is the default option going forward, but are they forgetting something?
An old friend – the Annual Investment Allowance (AIA): The AIA has been around since 2008 and allows companies to claim 100% relief on most plant and machinery, up to the AIA limit. The limit was increased from £200,000 to £1m per group in 2019 and therefore covers the majority of expenditure that small to medium sized companies typically make in a single year.
However, the AIA’s limelight was somewhat stolen by the introduction of the ‘super-deduction’ in 2021. The super-deduction gave up to 130% relief on qualifying assets acquired between 1 April 2021 and 31 March 2023, and was introduced to ensure that companies were not delaying their capital expenditure until after 1 April 2023, i.e. the date on which the main rate of corporation tax rate increased from 19% to 25%.
With the super-deduction being replaced by full expensing from 1 April 2023, companies might assume that they should follow the same approach.
However, although relief under full expensing is uncapped, it is generally preferable to claim the AIA in priority. This is for two reasons:
The AIA provides 100% relief in the year of expenditure on Special Rate Pool assets. By contrast, full expensing provides 50% relief in the first year with the balance added to the Special Rate Pool, which is then subject to Writing Down Allowances, currently at a rate of only 6% per annum.
Disposals of plant and machinery, for which full expensing has been claimed, will be subject to an immediate balancing charge (i.e. a taxable receipt) based on the proceeds received. Balancing charges do not apply to assets acquired using the AIA.
Example: Clarkson Farms Ltd has an existing capital allowances main pool balance of £500,000 and acquires a tractor for £150,000. The tractor is sold the following year for £100,000.
If full expensing is claimed, the company gets relief for the £150,000 in period 1, but faces a balancing charge in period 2 of £100,000, i.e. £50,000 of relief has been obtained.
If the AIA is claimed, the company still gets the £150,000 relief in period 1, but in period 2 there is no balancing charge. Instead, the £100,000 is deducted from the capital allowances main pool. This reduces the amount of writing down allowances the company gets, but only by £18,000. Claiming the AIA in this example saves £82,000.
This is only a timing difference, as the first option leaves the capital allowances pool at the higher level of £500,000. However, with writing down allowances applying at 18%, it will take several years for the saving to unwind.
Our view: Many companies will have claimed the super-deduction over the last few years and may overlook the existing AIA rules following the introduction of full expensing, not realising the impact if they come to sell assets. In our view, the AIA is a better option, particularly where there are large brought forward capital allowance pools.
