Full expensing: should this just be the beginning?
More could be done to transform business investment.
Full expensing allows corporate businesses to deduct the full cost of qualifying fixed assets in the year of investment for corporation tax purposes. This was previously in place from 1 April 2023 to 31 March 2026, but in the Autumn Statement the chancellor made this change permanent. The certainty that permanence provides is a welcome change from recent years but there are number of areas which suggest full expensing isn’t a silver bullet to solve the problems caused by a lack of business investment.
Firstly, what about all the businesses that aren’t incorporated? Whilst the ‘annual investment allowance’ allows most businesses to deduct in full any spend up to a limit of £1m, large scale partnerships, LLPs or sole traders will be at a tax disadvantage compared to corporates with similar capex profiles. This feels counterintuitive, as it could be argued that a fair and effective tax regime should provide very similar tax outcomes for very similar transactions by very similar businesses.
Secondly, don’t forget about the other pools. Full expensing only applies to the ‘main pool’ a tax category that covers equipment, IT assets and plant or machinery that has an expected life of less than 25 years. Most building services such as lighting, electrical installations, heating and air conditioning are not within the main pool. For these assets, known as the ‘special rate pool’, the full expensing regime only allows a 50% deduction as opposed to 100%. The remaining balance receives a tax deduction at 6% per year on a reducing balance basis. This takes over 30 years for full tax relief to be received.
Similarly, the structures and buildings allowance which applies, as the name suggests, to building works, gets 3% tax relief each year – this time on a straight-line basis, taking 33 years for full relief. To give context, imagine a building constructed in 1993 and ask yourself if this building in its original state is still fit for 2023 purposes?
Finally, tax relief is valuable, but mostly for profitable businesses with tax liabilities. Many fast-growing companies endure years of losses as they scale up. Our tax system should encourage these businesses to continue to invest as they grow. For example by taking on new space, developing new production facilities or locating their headquarters in the UK. A parallel can be drawn here with the research and development tax regime, where loss making small and medium-sized companies are currently able to surrender their loss for a payable tax credit – helping cashflow in those early loss-making years.
A three-point plan combining the above could build on the positive news of full expensing and enable transformational change in UK business investment.
First, extend full expensing to all business types – removing the distortion between companies and other business structures.
Second, improve the rate of relief for special rate pool and structural and building works. This could be tied to the important ESG agenda too. For example, for buildings that meet an agreed energy performance criteria, the special rate pool relief could be accelerated to four years, with the structure being relieved over approximately ten years, similar to buildings in a freeport site.
And third, create a payable tax credit for loss-making companies at a lower rate, for example 15% compared to the 25% corporate tax rate. This could ease the cashflow of fast-growing companies rather than deferring the benefit until future years when they become profitable.
Full expensing represents a statement of intent to address a previously unfavourable tax regime for business investment. However by being even braver, perhaps in the Spring Budget, the chancellor has an opportunity to move our capital expenditure incentives from good to world-beating.
Home >Articles > Full expensing: should this just be the beginning?
Full expensing: should this just be the beginning?
More could be done to transform business investment.
Full expensing allows corporate businesses to deduct the full cost of qualifying fixed assets in the year of investment for corporation tax purposes. This was previously in place from 1 April 2023 to 31 March 2026, but in the Autumn Statement the chancellor made this change permanent. The certainty that permanence provides is a welcome change from recent years but there are number of areas which suggest full expensing isn’t a silver bullet to solve the problems caused by a lack of business investment.
Firstly, what about all the businesses that aren’t incorporated? Whilst the ‘annual investment allowance’ allows most businesses to deduct in full any spend up to a limit of £1m, large scale partnerships, LLPs or sole traders will be at a tax disadvantage compared to corporates with similar capex profiles. This feels counterintuitive, as it could be argued that a fair and effective tax regime should provide very similar tax outcomes for very similar transactions by very similar businesses.
Secondly, don’t forget about the other pools. Full expensing only applies to the ‘main pool’ a tax category that covers equipment, IT assets and plant or machinery that has an expected life of less than 25 years. Most building services such as lighting, electrical installations, heating and air conditioning are not within the main pool. For these assets, known as the ‘special rate pool’, the full expensing regime only allows a 50% deduction as opposed to 100%. The remaining balance receives a tax deduction at 6% per year on a reducing balance basis. This takes over 30 years for full tax relief to be received.
Similarly, the structures and buildings allowance which applies, as the name suggests, to building works, gets 3% tax relief each year – this time on a straight-line basis, taking 33 years for full relief. To give context, imagine a building constructed in 1993 and ask yourself if this building in its original state is still fit for 2023 purposes?
Finally, tax relief is valuable, but mostly for profitable businesses with tax liabilities. Many fast-growing companies endure years of losses as they scale up. Our tax system should encourage these businesses to continue to invest as they grow. For example by taking on new space, developing new production facilities or locating their headquarters in the UK. A parallel can be drawn here with the research and development tax regime, where loss making small and medium-sized companies are currently able to surrender their loss for a payable tax credit – helping cashflow in those early loss-making years.
A three-point plan combining the above could build on the positive news of full expensing and enable transformational change in UK business investment.
First, extend full expensing to all business types – removing the distortion between companies and other business structures.
Second, improve the rate of relief for special rate pool and structural and building works. This could be tied to the important ESG agenda too. For example, for buildings that meet an agreed energy performance criteria, the special rate pool relief could be accelerated to four years, with the structure being relieved over approximately ten years, similar to buildings in a freeport site.
And third, create a payable tax credit for loss-making companies at a lower rate, for example 15% compared to the 25% corporate tax rate. This could ease the cashflow of fast-growing companies rather than deferring the benefit until future years when they become profitable.
Full expensing represents a statement of intent to address a previously unfavourable tax regime for business investment. However by being even braver, perhaps in the Spring Budget, the chancellor has an opportunity to move our capital expenditure incentives from good to world-beating.
