As flagged up in last November’s Autumn Statement, the Chancellor announced that the government intends to extend full expensing of plant or machinery expenditure to leased assets when fiscal conditions allow and draft legislation for this measure is to be published soon.
To recap, full expensing allows companies to write off 100% of the cost of buying plant or machinery that would otherwise by allocated to the main pool for capital allowances at the rate of 18% per annum on a reducing balance basis which are generally but not exclusively loose items. New plant and machinery that would otherwise be allocated to the special rate pool, which are generally assets that are integral to a building, attracts a 50% first year allowance and then the normal 6% writing-down allowances. These preferential rates are only available to companies, but all businesses can access 100% relief on plant or machinery expenditure, both for main pool and special rate expenditure, via the annual investment allowance (AIA). However, the AIA is capped at £1m per annum. Therefore, full expensing is particularly valuable for companies that invest large sums in buying loose plant or machinery.
At present, there is an exclusion within CAA 2001 s 46 for leased assets, meaning that full expensing is not available for loose plant or machinery unless it is used by the owner. There is a carve out from the leasing exclusion for what is termed ‘background plant or machinery’ but that only applies to fixed plant or machinery that is leased with a building. It does not cover special or loose assets. Therefore, the extension of full expensing to leased assets would be extremely beneficial to the leasing industry who could then enjoy an initial 25% reduction in the effective cost of new plant or machinery with no cap on the level of investment. This would also have a beneficial effect for lessees who would be expected to share part of this tax benefit through lower leasing charges.
However, the wording of the Budget announcement implies that the extension of full expensing for leasing is far from certain as the Chancellor referred to the timing of implementation as being ‘when fiscal conditions allow’ suggesting that such a move is currently unaffordable. In addition, the legislation would need to wrap around the existing long funding lease rules and the hire purchase rules that treat the lessee as owner for capital allowances purposes. Tax avoidance will also be another concern, especially if the current exclusion will also be lifted for overseas leasing. As always, the devil will be in the detail.
There was another measure announced in the Spring Budget that will also impact on capital allowances and that was the abolition of the regime for Furnished Holiday Lettings (FHL). Generally, capital allowances are not available in respect of plant or machinery for use in a dwelling-house, unless the property concerned qualifies as a FHL as defined in ITTOIA 2005 Part 3 Chapter 6 for income tax or CTA 2009 Part 4 Chapter 6 for corporation tax.
From April 2025, the preferential tax regime for FHLs will be abolished and therefore residential properties on short-term furnished holiday lets will be treated the same as residential properties let to long-term tenants where no capital allowances are available to the landlord. However, there will still be situations where expenditure on plant or machinery situated within residential properties qualifies for capital allowances, such as the case with serviced apartments, certain student accommodation, care homes and special facilities such as prisons and residential accommodation for members of the armed forces.
Home >Articles > Spring Budget 2024: Capital allowances: extension of full expensing to leased assets
Spring Budget 2024: Capital allowances: extension of full expensing to leased assets
As flagged up in last November’s Autumn Statement, the Chancellor announced that the government intends to extend full expensing of plant or machinery expenditure to leased assets when fiscal conditions allow and draft legislation for this measure is to be published soon.
To recap, full expensing allows companies to write off 100% of the cost of buying plant or machinery that would otherwise by allocated to the main pool for capital allowances at the rate of 18% per annum on a reducing balance basis which are generally but not exclusively loose items. New plant and machinery that would otherwise be allocated to the special rate pool, which are generally assets that are integral to a building, attracts a 50% first year allowance and then the normal 6% writing-down allowances. These preferential rates are only available to companies, but all businesses can access 100% relief on plant or machinery expenditure, both for main pool and special rate expenditure, via the annual investment allowance (AIA). However, the AIA is capped at £1m per annum. Therefore, full expensing is particularly valuable for companies that invest large sums in buying loose plant or machinery.
At present, there is an exclusion within CAA 2001 s 46 for leased assets, meaning that full expensing is not available for loose plant or machinery unless it is used by the owner. There is a carve out from the leasing exclusion for what is termed ‘background plant or machinery’ but that only applies to fixed plant or machinery that is leased with a building. It does not cover special or loose assets. Therefore, the extension of full expensing to leased assets would be extremely beneficial to the leasing industry who could then enjoy an initial 25% reduction in the effective cost of new plant or machinery with no cap on the level of investment. This would also have a beneficial effect for lessees who would be expected to share part of this tax benefit through lower leasing charges.
However, the wording of the Budget announcement implies that the extension of full expensing for leasing is far from certain as the Chancellor referred to the timing of implementation as being ‘when fiscal conditions allow’ suggesting that such a move is currently unaffordable. In addition, the legislation would need to wrap around the existing long funding lease rules and the hire purchase rules that treat the lessee as owner for capital allowances purposes. Tax avoidance will also be another concern, especially if the current exclusion will also be lifted for overseas leasing. As always, the devil will be in the detail.
There was another measure announced in the Spring Budget that will also impact on capital allowances and that was the abolition of the regime for Furnished Holiday Lettings (FHL). Generally, capital allowances are not available in respect of plant or machinery for use in a dwelling-house, unless the property concerned qualifies as a FHL as defined in ITTOIA 2005 Part 3 Chapter 6 for income tax or CTA 2009 Part 4 Chapter 6 for corporation tax.
From April 2025, the preferential tax regime for FHLs will be abolished and therefore residential properties on short-term furnished holiday lets will be treated the same as residential properties let to long-term tenants where no capital allowances are available to the landlord. However, there will still be situations where expenditure on plant or machinery situated within residential properties qualifies for capital allowances, such as the case with serviced apartments, certain student accommodation, care homes and special facilities such as prisons and residential accommodation for members of the armed forces.
