Full Expensing: Does it go far enough?

In the 2023 Spring Budget the government announced the largest ever Capital Allowances incentives in the form of Full Expensing. Many have welcomed this simplification, but will it have the desired impact of encouraging businesses to invest, especially those in the retail sector given the potentially lower risk and lower cost route to market through online offerings?

Providing long term certainty

In today’s uncertain economic climate many businesses, especially retailers, are nervous about committing to current and future investment. It is thought that this is one of the factors holding back the UK economy and so additional incentives and long term certainty is essential.

To stimulate investment during COVID-19, the government introduced the Super-Deduction in 2021. Claimed to be the biggest two-year business tax cut in modern British history, the move to encourage companies to make additional investments, and bring planned investment forward always appeared to have a short-term life span. Due to its temporary nature, this did not provide enough certainty for business leaders to commit to long term investment planning.

With the expiry of Super-Deduction for qualifying expenditure incurred up to 31 March 2023, the Chancellor needed to further stimulate longer term view on investment, especially with a planned move to a headline Corporation Tax rate of 25% going ahead from April 2023.

As a first step, in Autumn 2022 the feared cut in the quantum of the temporary Annual Investment Allowance (AIA) back to £200k was replaced by a more permanent £1m per annum ‘first-year allowance’ for qualifying expenditure. However, many businesses felt this was insufficient to stimulate long term investment confidence coupled with the headline Corporation Tax rate increase.

The latest announcement at the 2023 Spring Budget of the Super-Deductions’ replacement ‘Full Expensing’ has been seen as an attempt to soften the impact on businesses facing the Corporation Tax rate hike. Full Expensing, subject to Finance Bill approval, provides companies incurring qualifying expenditure between 1 April 2023 and 31 March 2026 with at least a three-year foresight of investment planning over the two years that the Super-Deduction provided. 

What does that mean for your business?

Companies within the charge to UK corporation tax investing in qualifying assets can benefit from immediate tax relief of 100% or 50% (depending on asset type) within the year of expenditure. 

This is good news for companies that incur substantial expense on plant and machinery such as retailers. However, for the vast majority of SME’s this is likely to have little impact given the availability of the AIA. Furthermore, Full Expensing will only be useful to companies to the extent they have profits against which capital allowances can be relieved. With profitability in the retail sector suffering in recent years, and capital investment projects having long lead times to the generation of profits, this will delay the benefit of Full Expensing and could for some companies, mean future relief is restricted under the loss relief rules in any given year where group profits exceed £5 million. Retailers, like all other businesses, will need to structure and plan their long term investments to ensure they are able to access the benefit of Full Expensing at the earliest opportunity.

Where Full Expensing could be maximised is the benefit from accelerated tax relief on expenditure on plant and machinery to become ESG compliant. This can include investing in plant that also provide operating economic benefits, from LED lighting swap-outs to bringing forward replacement with high-efficiency heating and cooling systems and changes following heat load assessments.

Unfortunately, unincorporated businesses will not benefit from the new Full Expensing rules, but are entitled to claim the AIA, which offers the same benefits as Full Expensing for the investments it covers up to £1 million of qualifying expenditure per year.

While Full Expensing is welcomed by many, there are cynics of the announcement who highlight that the system combined with shift from 19% to 25% Corporation Tax rate, provides for an after-tax value, the actual relief for the new and the old systems are the same. Full expensing results in a 25p tax saving for every £1 invested. The Super-Deduction was deliberately set at a rate to achieve the same result (19% x 130% Super-Deduction rate equals 25%). 

The timeously introduction of Full Expensing had reduced any incentive for companies to defer investment until the 25% rate applied (April 2023), but what is likely to aid longer term investment decisions is the Chancellor’s long term ambition to make Full Expensing permanent, which given the time necessary for new investment to be confirmed, may be key to its effectiveness over time for both retailers and the wide business community.

Should you require assistance with understanding how Full Expensing will impact your business, or with capital allowance claims in general, please get in touch with Andrew Hawley or your usual Crowe contact.