On 1st April 2023, the UK Government launched Full Capital Expensing, a new tax incentive enabling firms to reduce their Corporation Tax if they invest in their businesses.
What is Full Expensing?
Businesses can receive 100% first year capital allowances on qualifying purchases, which are broadly termed plant and machinery but cover an array of business equipment. So, if you want to buy new equipment for your business, this is a great way to invest and effectively get a discount.
This investment allowance is designed to offset a proportion of the increase in Corporation Tax, affecting those businesses whose rate has risen from 19% to 25%, though the allowance can be claimed by all.
This incentive allows companies to fully write-off the cost of their investment in the year the asset was purchased. The value of the new asset is deducted from company profits before the calculation for Corporation Tax, allowing the business to avoid paying tax on the equivalent value of company profits. A saving of 19% or 25% of the original purchase price of the equipment, depending on your tax band.
What Are Capital Allowances?
Capital allowances are a form of business tax relief, allowing businesses to reduce the value of their profits by the cost of qualifying assets, thus allowing them to pay less Corporation Tax.
Alongside Full Expensing there are other pre-existing capital allowances, such as the Annual Investment Allowance (AIA), Writing Down Allowances (WDAs), First-Year Allowances (FYAs), and Structures and Buildings Allowances (SBAs).
Capital allowances enable businesses to reduce their tax liability, whilst boosting their future potential.
For more information, take a look at the government website, and consult your tax accountant.
Capital allowances such as Full Expensing and the Annual Investment Allowance are claimed on your tax return. We always recommend seeking advice from a qualified Tax Accountant before making large investments and completing your annual tax return.
Qualifying for the Full Expensing Allowance
Full Expensing can be claimed by incorporated businesses that are subject to Corporation Tax, on purchases of new/unused equipment after 1st April 2023. Unincorporated businesses need to claim the Annual Investment Allowance instead.
Purchases covered by Full Expensing and the Annual Investment Allowance
- Items that you keep, to use in your business.
- Costs of demolishing plant and machinery.
- Parts of a building considered integral.
- Some fixtures, including air-con, kitchens and bathrooms, and alarm/cctv systems.
- Building alterations required to install plant and machinery.
- Vehicles for moving goods, but not business cars.
- Items must be new and unused.
You cannot claim Full Expensing or Annual Investment Allowances for:
- Items you lease – you must have a Hire Purchase Agreement in place, be using a Business Loan to buy the equipment or have purchased the item outright.
- Items used only for entertainment.
- Land, structures, buildings or utilities.
- Cars (but vehicles for moving goods are permitted).
If an item is sold after claiming Full Expensing tax relief, this may trigger a balancing charge from HMRC.
For the most up-to-date information as to what you can claim capital allowances on, consult the .gov website.
In addition to Full Expensing, an additional scheme exists called The Annual Investment Allowance (AIA)
The Annual Investment Allowance permits a business to deduct the full cost of a qualifying items when calculating taxable profits, as long as the remaining Annual Investment Allowance is sufficient (i.e. the full £1m has not been claimed yet) and the asset is a qualifying expenditure (see list above). It was introduced in 2008 to encourage businesses to invest, allowing firms to claim the full tax allowance in the first year of purchase.
The AIA can be claimed by all businesses, limited companies, partnerships and sole traders. Sole traders and partnerships with an income of £150,000 per year or less can also choose to claim the AIA through a simpler accounting system called ‘cash basis'.
For small businesses not applying the cash accounting basis, the Annual Investment Allowance provides 100% first-year relief for plant and machinery investments. From April 2023, this will be permanently set at expenditure claims totalling up to £1 million.
However, many businesses cannot afford to make large capital investments using free cash and would prefer to spread the cost. That's where alternative finance providers like Portman Asset Finance come in. Portman are able to provide both Business Loans and Hire Purchase agreements, funding options that allow your business to qualify for Capital Allowances such as Full Expensing. Take a look at our Equipment Finance page to find out more.
If you would like to invest in your business and spread the cost of new equipment, plant and machinery, give the finance experts at Portman a call on 01604 669343
Or visit us online at portmanassetfinance.co.uk