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A lowdown on full expensing for SMEs

Author: ICAEW

Published: 23 May 2024

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Announced as a permanent capital allowance in the 2023 Autumn Statement, full expensing is a boon for companies investing in capital assets. Here, we examine the details of the new allowance and how to compile a claim.

Under current tax rules, incorporated companies incurring qualifying expenditure on capital assets can claim full expensing and receive up to 100% first-year tax relief. Effectively, this offers them a 25% discount on a wide range of purchases. In contrast to the Annual Investment Allowance (AIA), which has a £1m threshold, there is no upper limit to claims made under full expensing. As such, it will particularly benefit those companies spending more than £1m per year on capital assets. 

Qualifying expenditure

“Qualifying expenditure includes large plant machinery and equipment, but it can also be used for computers and office furnishing – most items of equipment that the business uses on an ongoing basis,” says Richard Jones, Senior Technical Manager for Tax Policy at ICAEW. 

There are some exclusions. Sarah Gardener, Founder of Allegro Tax, explains: “The asset has to be new and unused. It can’t be a gift to the company. It can’t be a car – cars are excluded, although vans, lorries and tractors are included. Companies should also remember their AIA, which does allow claims for qualifying second-hand assets.”

Full expensing also excludes assets that will be leased out to somebody else. However, the government is consulting on the leasing industry exemption and this exclusion could change in the future.

How to compile a claim

Full expensing claims need to be submitted as part of the company tax return. “When the accountant or tax adviser prepares the return, they will make a claim for full expensing,” Gardener says. “This must be filed within a year of the company’s accounting period end. If you decide to change it, the claim is then open for amendment for another year after that.” 

To compile a claim, it is important to keep good records of all company purchases and note if the item is new or second-hand. This will make the submission easier and help answer any possible queries from HMRC. “Ensure that you keep invoices that contain key details, such as the date of expenditure and the date of any contract signatures to support submissions,” says Jones. “As full expensing is new, HMRC has not yet started making widespread inquiries into claims, but inquiries will start to come and it is good to have as much evidence as possible to show that claims are valid.”

Understanding the rates

There are two types of full expensing: 100% up-front relief for items that qualify for the main rate pool and 50% for items that go into the special rate pool. Jones says: “Certain assets only get a 50% allowance. This includes integral features, such as hot and cold water systems, electrical systems, solar panels and so on.” The remaining 50% is then written off over time in the special rate pool at a reducing balance rate of 6% per year.

For items that fall into the special rate pool, companies should first seek to claim under the AIA to fully benefit from capital allowances. “If you claim under the full expensing special rate pool, you get a 50% allowance, whereas if you use the AIA, you get 100% [up to the £1m threshold], so you are better off allocating your AIA to your special rate pool first,” states Gardener. 

Sales of assets

If a company later decides to sell an asset for which it has submitted a claim, it will be subject to a time-unlimited clawback from HMRC. “If you sell an asset, you must bring in what is known as a balancing charge in the year it is sold. This is to avoid companies claiming full relief when they purchase the asset and then profiting from an onward sale,” says Gardener. “So, if, for example, you bought an asset for £100,000 and sold it a few years later for £10,000, you would have to bring £10,000 income into your tax return to account for it. If it was claimed for using the special rate pool, you would have to bring in £5,000 as taxable income and the remaining £5,000 is deducted from the special rate pool.” 

Once again, this points to the importance of good record keeping when it comes to full expensing, with companies needing to maintain records on original purchases, claims and details of onward sales. 

Further information and support on full expensing can be found on the HMRC and government websites. Working with an accredited accountant or tax adviser will also help companies navigate the new capital allowance and understand how it fits into the wider landscape of capital allowances and tax relief.

What you need to know

Full expensing will particularly benefit companies that incur high capital expenditures on machinery and equipment, but it is important to understand the parameters. 

If your company is incurring expenditure that would qualify for full expensing:

•  Understand what kind of capital assets qualify for the relief and which pool they fall into.
•  Maintain good records of new purchases and detail key information, such as purchase date and evidence that the item is new and not second-hand.
•  Submit claims as part of your tax return for the year the investment was made. 
•  Consider if any items in the special rate pool would be best claimed for using the AIA to get the fastest relief possible.
•  Remember, onward sales of any assets claimed for under full expensing are subject to clawback from HMRC as the disposal proceeds are treated as taxable income.
•  Develop in-house expertise or work with accredited partners to navigate the intricacies of the new regime and how it intersects with other capital allowance options.

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