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What does full expensing mean for your clients?

7th Jul 2023
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Allica Bank is Britain’s award-winning business bank focused exclusively on supporting established...
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It’s been a few months now since Chancellor Jeremy Hunt announced the full expensing scheme for plant and machinery, and we’ve had a bit of time to get used to the new policy.

What does full expensing mean for your clients?
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Full expensing was the much-awaited successor to the previous super-deduction scheme, and a key part of the government’s plans to encourage business investment and grow the economy.

It’s not relevant to every business, however, and we’d argue there’s a previous budget announcement that shouldn’t be overlooked: a permanent change to the annual investment allowance (AIA).

Here’s what you need to know.

What’s new?

Under full expensing, companies can claim 100% first-year relief when they purchase qualifying new main rate plant and machinery, from 1 April 2023 until 31 March 2026.

At the same time, the existing 50% first-year allowance on special rate expenditure was extended until the same date.

By comparison, the super-deduction scheme, which expired on 31 March 2023, allowed companies to claim 130% on qualifying new plant and machinery.

It’s also worth bearing in mind that the change coincides with the corporation tax hike that came in this April, raising the main rate from 19% to 25% for companies making above £50,000 a year (the marginal rate of 26.5% applies on profits between £50,000 and £250,000).

Hunt has said he plans to make full expensing a permanent measure “as soon as we can responsibly do so”.

What’s the difference for SMEs?

Relief at 100% in the same year of purchase sounds like a big saving – and it is – but for many smaller businesses, the change won’t actually be very noticeable.

That’s because most businesses investing in plant and machinery will fall under another tax relief: the AIA.

The AIA already provides 100% first-year relief on eligible plant and machinery expenditures. Unlike full expensing, it’s available to all businesses – not just limited companies. Furthermore, it’s available on the full range of second-hand assets, not just new and unused assets. Although cars are not eligible for the AIA or full expensing.

The allowance stood at £200,000, before being temporarily raised to £1 million in 2019. As announced in the Autumn Statement 2022, it’s now been set permanently at the £1m mark.

This is a high threshold for capital expenditure, and as critics of full expensing have pointed out, few businesses are likely to spend over this amount to benefit from full expensing anyway.

While HMRC did not provide estimates for the number of businesses that could benefit from full expensing, it did predict that the measure could have a small administrative impact on “an estimated 7,000 companies that incur qualifying expenditure on plant and machinery in excess of the £1 million AIA”.

In an Any Answers post in April, an AccountingWEB user asked if a small limited company spending less than £1m might see any benefits from full expensing compared to the AIA. Most responses suggested it was no different in practice for most businesses.

One user pointed out that, taking the higher corporation tax rate into account, the change only amounts to a 30p difference per £100 compared to the old super-deduction scheme: full expensing saves 100 x 25% (£25), while the super-deduction saved 130 x 19% (£24.70). In other words, the two schemes offer essentially the same benefit.

Another noted that there’s a difference when selling capital items:

“Full expensing has assets that are outside the pool, so a separate balancing charge arises.

“Pool assets (i.e. AIA items) will trigger a disposal value on the pool, but if there is balance on the pool (for non 100% AIA items) then this may avoid the immediate ‘hit’ of a balancing charge.

“[This is] likely to result in very similar outcomes, but it seems preferable to use AIA first. Also, using the AIA avoids keeping separate records of the full[y] expensed items.”

Could your clients benefit?

Even if we haven’t seen a significant change from the previous regime, full expensing and the AIA are still excellent incentives for your clients to invest and grow – and they’re certainly worth talking about.

For businesses that are likely to spend over the £1m threshold, the full expensing scheme offers a welcome replacement to the super-deduction and continued levels of relief as the corporation tax rate rises.

At Allica Bank, we believe in unlocking opportunities for established businesses to grow through fast, flexible asset finance – and we know accountants have an essential role to play in supporting them.

Reach out to your local Allica Bank relationship manager about how your client might be able to benefit.

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