Capital Allowances - Full Expensing Update - What Does the Draft Legislation Reveal?
We have now seen the draft legislation for the newly announced Full Expensing rules announced at the recent budget, learning more about some of the restrictions that apply. But first a recap:
Full Expensing – in case you missed it
The spring budget announced the new full expensing rules: 100% first year allowances for main pool plant & machinery expenditure, and 50% first year allowances for special rate plant & machinery expenditure, incurred after 1st April 2023. This was welcome news, as the generous Super Deduction was always due to end on the 31st March.
Check out our article from the day of the budget to get up to speed on the Full Expensing announcement.
The Draft Legislation - Restrictions
We’ve now laid eyes on the draft legislation, and it certainly reinforces Full Expensing’s role as a continuation of the Super Deduction.
In practical terms, relief is offered in the same way as the Super Deduction was, albeit with the 130% enhancement reduced to 100% (although the net effect is similar where the increased Corporation Tax rate applies). Unfortunately, many of the restrictions applicable to the Super Deduction are also present:
Assets must be unused and not second-hand
This is of particular note in relation to property purchases. No Full Expensing will be available on qualifying assets included in a property transaction, unless they are unused (i.e. from a developer). The Annual Investment Allowance (AIA) may still be available in this case.
Asset must not be a car
Cars have their own set of rules based on their emissions. Commercial vehicles that do not fit the definition of a car may still benefit from full expensing.
Cannot be expenditure on a long-life asset
Long-life assets typically include plant & machinery assets with an expected economic life of more than 25 years. Outside of any first year allowances, main pool assets that are caught by the long-life asset rules attract special rate pool treatment, and are specifically excluded from full expensing.
Assets purchased for leasing are restricted
This one can be tricky, as many businesses might hold their property in one entity, while another group company operates from the building under a lease or licence (PropCo – OpCo arrangement). For expenditure incurred by the PropCo, full expensing will not be available, except where the assets are considered “background plant & machinery”, the definition of which could fill an article of its own.
Clawback where assets subsequently sold
Par for the course for first year allowances, where the assets are subsequently sold for proceeds, balancing charges may arise. For this reason, and as with the Super Deduction, it’s important to have a record of the different assets included in a Full Expensing claim.
No Sign of the “Contract Date” Conditions
While much of the legislation looks familiar, one aspect of the Super Deduction restrictions is absent; contract date requirements. The Super Deduction required that the earliest physical contract for works in relation to the expenditure being claimed, had to be after 3 March 2021 (the budget day the Super Deduction was announced.)
Currently the draft legislation indicates no such restrictions apply to Full Expensing – something which will simplify the process of claiming. In terms of timing all that matters is that the expenditure is incurred after 1st April 2023, but contract dates need not be considered.
This is good news for companies already underway with improvement projects prior to the Spring Budget.
Despite some restrictions, Full Expensing is still great news for companies looking to invest in the UK. If you have questions about Full Expensing or any aspect of capital allowances, get in touch at cal@yes.tax
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