How does full expensing work?
Full expensing is only available under very specific circumstances.
First, it is only available to companies subject to corporation tax. Sole traders and partnerships are excluded, although they are still eligible for the 100% annual investment allowance — which is capped at £1 million per year.
Second, full expensing only applies to certain plant and machinery items, which refers to most capital assets — other than land, structures and buildings — used for business purposes (see below for examples).
Third, plant and machinery must be new and unused to qualify for the policy. It also cannot be a car, given to the company as a gift, or purchased to lease to someone else.
Fourth, expenditure must be within the ‘main rate pool’ of plant and machinery. A list of items that may qualify for full expensing includes:
- machines such as computers, printers, lathes and planers
- office equipment such as desks and chairs
- vehicles such as vans, lorries and tractors (but not cars)
- warehousing equipment such as forklift trucks, pallet trucks, shelving and stackers
- tools such as ladders and drills
- construction equipment such as excavators, compactors, and bulldozers
- some fixtures, such as kitchen and bathroom fittings and fire alarm systems, in the non-residential property.
The other type of plant and machinery — items in the ‘special rate pool’ — do not qualify for full expensing, but they do for a 50% first-year allowance, subject to the same conditions that apply to full expensing. Capital allowances can then be claimed on the remainder of expenditure at a 6% rate in subsequent accounting periods.
This 50% allowance is a holdover from the super-deduction and will last until 2026, like the full expensing scheme.
Example of full expensing and 50% first-year allowance
A company purchases a new production line and various new items of other main rate plant and machinery, incurring £10m. It also spends £2m on a brand-new electrical system, which is a special rate expenditure.
Because of the new policies, the company can claim £10m under full expensing and £1m under the 50% first-year allowance in the year it made the purchases. The remaining balance of £1m can then be spread over the next accounting periods with writing down allowances of 6%.
Talk to us about full expensing.
