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Spring Budget 2023: Changes to the capital allowances regime | accountingweb

Changes to capital allowances bolster investment


Full expensing for investment in plant and machinery introduced in the Budget is a huge boost for companies seeking to invest in new equipment.

15th Mar 2023
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The Chancellor in his Spring Budget has introduced the much-discussed measure of full expensing for investment in qualifying expenditure on new plant and machinery. This is a huge boost for companies seeking to invest in new IT, plant and equipment. The measure is set to be in place for three years with the intention of making it a permanent feature of the capital allowances investment incentives regime when finances will allow. 

Although the Chancellor predicted that only 10% of companies would be subject to the new 25% corporation tax rate, a significant number of companies with profits between £50,000 and £250,000 will pay an increased rate of between 19% and 25%. The new full expensing measure will be a welcome reform that will allow companies investing in qualifying items to immediately claim 100% of the expenditure incurred and lower their taxable profits which the higher rate of corporation tax will apply to.

Super deduction replacement

This will be a welcome replacement for the super deduction, set to end on 31 March 2023 which allowed companies to claim 130% of the expenditure incurred on qualifying “main pool” plant and machinery. The rules relating to what qualified for both the super deduction and the special rate (SR) first-year allowance and when expenditure was incurred were complex and led to HMRC sending a series of “one to many” letters to taxpayers cautioning them to ensure that they had correctly claimed the relief and warning of penalties and interest on unpaid tax. 

The new rules should simplify the process and give more certainty to businesses seeking to make investment decisions around the availability of the tax relief. One of the criticisms of the super deduction regime was that it was not in place for a sufficiently long period to encourage investment in new major capital projects. By the time that projects were proposed, planned and procured - which can take a number of years – the measure hit a cliff edge and was over. As such, it didn’t encourage new investment and was only advantageous for projects that met the strict criteria of qualification.

Details of the measure were as follows. 

  • Full expensing is only available to companies that incur expenditure on new so-called main pool plant and machinery.
  • Expenditure must be incurred after 1 April 2023 and before 1 April 2026.
  • The 50% first-year allowance for expenditure by companies on new special rate (including long life) assets until 31 March 2026.
  • It is only available to corporates. Unincorporated businesses can only claim the £1m annual investment allowance and plant and machinery writing down allowances that currently exist.
  • Plant and machinery must be new and unused and does not apply to cars, given to the company as a gift, or bought to lease to someone else.
  • Expenditure on second-hand assets and those bought to lease to someone else can still qualify for the AIA.
  • For “special rate” expenditure, which doesn’t qualify for full expensing, a 50% first-year allowance can be claimed instead, subject to the same conditions that apply for full expensing. This means that a company can claim a deduction from taxable profits that is equal to 50% of their qualifying expenditure in the year that expenditure is incurred. Capital allowances can be claimed on the balance of expenditure in subsequent accounting periods at the 6% rate of writing down allowances for special rate expenditure.

Property investment companies

It is currently unclear if the measure will apply to property investment companies leasing background plant and machinery fixtures in property. This was initially excluded when the super deduction measure was introduced but subsequently amended and clarified that it would be available to investors too. The rationale was that it could encourage and stimulate the commercial property industry with associated growth in supply chains. It would be difficult to argue against the same rationale applying, although the guidance notes currently state that full expensing does not apply to leasing scenarios.

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Replies (11)

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By accountantccole
16th Mar 2023 07:05

Does this mean a second hand car (not leased on) would now get 50% deduction in year 1 as a special rate asset?

Thanks (1)
Replying to accountantccole:
By Ruddles
16th Mar 2023 15:20

No. (a) a second hand car is not new and (b) a second hand car is a car.

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Replying to Ruddles:
By accountantccole
17th Mar 2023 15:44

Skim reading - that'll teach me!

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By lam_ac
16th Mar 2023 09:33

Can’t see that many companies with profits between £50k and £250k having capital expenditure of more than £1m (relieved by existing AIA).

Thanks (6)
By Duggimon
16th Mar 2023 09:42

Is it the case that anyone spending less than £1m in a year on assets qualifying for AIA will be completely unaffected by this change?

Thanks (3)
Replying to Duggimon:
Roy Mitchell
By Roy3112
16th Mar 2023 09:52

Spot on. Thats exactly what I thought. Its a headliner with very little impact

Thanks (4)
Replying to Roy3112:
By Paula@Butt
16th Mar 2023 10:02

Probably only relevant to that "10%" that will pay 25% tax

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Replying to Paula@Butt:
By philaccountant
16th Mar 2023 10:17

Barely relevant to them though.

What company of that size is going to have its investment decisions swayed by the speed at which they receive tax relief? Are they really not going to invest in that piece of equipment they need because they won't get a tax deduction fast enough?

Looks like tokenism to me.

Much like the pension giveaway, the exchequer will lose tens of thousands of pounds in tax revenue for every retirement this delays. If you believe it will delay any at all.

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By ralan
16th Mar 2023 10:18

Another headling gimick thought up by someone in a cupboard at No 11 to justify his inflation linked salary and Pension which he can now contribute an extra £20k into.

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By lam_ac
16th Mar 2023 10:42

The Chancellor's statement that only 10% of companies will be subject to the 25% tax charge is implicitly saying that only 10% of companies would benefit from the new 100% capital allowance. And I suspect only a fraction of those given the £1m AIA. I suspect a very few FTSE scale business will benefit significantly. Others not at all.

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By indomitable
16th Mar 2023 11:35

Complete smoke and mirrors, this will only effect larger companies and will have no impact on most SME's

The conservatives are a joke at the moment

They need to sort out 'public expenditure' not the tax take which is already far too high.

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