Capital Allowances Head to Head – Annual Investment Allowances vs Full Expensing
Following the announcement of the Full Expensing in the spring budget, companies are presented with a choice of reliefs for their plant & machinery expenditure. This article will examine the commonalities and differences between the Annual Investment Allowances (“AIA”) and Full Expensing.
Benefit of each
- Full expensing provides an unlimited 100% first year allowance for Main pool plant & machinery expenditure, and 50% first year allowances for Special Rate spend (with the remainder arising over time as 6% annual writing down allowances).
- The Annual Investment Allowance offers 100% first year allowances for Main pool and Special Rate pool plant & machinery spend, for the first £1m spent by a business.
Both reliefs offer potential 100% first year allowances, but there are some subtle differences that may impact how a business uses these reliefs. In a nutshell:
- Full Expensing has more restrictions.
- AIA is limited, but better for Special Rate spend.
- AIA is better where assets may be subsequently sold.
Each of these points is explored further below.
Restrictions
The conditions of each relief differ, with Full Expensing being more restrictive:
Both allowances:
- Must be claimed in the year the expenditure is incurred
- Cannot be claimed on cars (commercial vehicles like vans are ok)
- Cannot be claimed on long-life assets (expected life >25 years)
Full Expensing:
- May only be claimed on new & unused assets
- May only be claimed on expenditure incurred after 1st April 2023
- May not be claimed on assets purchased for leasing (with some detailed exceptions)
Just as it was with the Super Deduction before, the Full Expensing leasing restriction can often bite for landlords, or even groups holding property in one entity and operating the trade in another. Although some assets aren’t subject to the leasing restriction, notably most integral features, the rules should be considered when planning capital projects around a PropCo – OpCo structure.
Limited AIA & Special Rate Expenditure
While Full Expensing is unlimited, the expenditure to which the AIA can be applied to is limited to £1m per year per business. Note that this is shared between the group, or businesses under common control.
The other significant diversion is that the AIA can also apply it’s 100% first year allowances to Special Rate spend, while Full Expensing only allows for 50% first year allowances on Special Rate. The remaining 50% arises as writing down allowances at 6%, so it can take many years for this remaining relief to manifest completely.
With this in mind it’s important to prioritise any AIA available on Special Rate expenditure, before application to Main pool spend.
Complications arise when you have a portion of plant & machinery expenditure that is restricted from a Full Expensing claim, and here, more detailed modelling may be useful.
Disposals
Both allowances have ways to claw back the relief where the qualifying plant & machinery asset is subsequently disposed of, but AIA is preferable in this case.
Where an asset that was claimed as Full Expensing is later disposed of for proceeds, those proceeds will arise as a fully taxable receipt (a balancing charge).
Conversely, where an asset that was claimed as AIA is disposed of for proceeds, this value can be set off against the capital allowances pools first, with any excess then arising as a balancing charge. The advantage here is that, value in the pools would have otherwise arisen as relief over many years, so its preferable to empty the pools as much as possible with such disposal proceeds, reducing the balancing charge paid, and gaining a significant timing benefit.
AIA vs Full Expensing
In a sentence, AIA is better, but limited.
For smaller companies who will not exceed the £1m plant & machinery limit, its straightforward to claim the lot as AIA. Its only when the spend is larger that the unlimited nature of Full Expensing comes into its own. Due to the restrictions and limits discussed above, the best answer may often be a combination of both reliefs.
For any questions on your business’s capital spend and the best reliefs, get in touch at cal@yes.tax
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