Full Expensing: How it can help improve business investment

We’re committed to equipping our partners with the understanding and insight they need to strategically navigate an ever-evolving financial climate. In the 2023 Autumn Statement, Chancellor Jeremy Hunt made full expensing for qualifying plant and machinery permanent. In the recent 2024 Spring Budget, the chancellor announced an ambition to extend this measure to leased assets with draft legislation expected to be published shortly. This is a new development for which the Finance and Leasing Association have been campaigning strongly.

To understand what full expensing is, first it is important to understand what a capital allowance is: 

What are capital allowances?

Capital allowance is a type of tax relief for UK businesses. It enables businesses to deduct the taxable value of a qualifying asset from their profits, before paying tax. This is in recognition of the depreciative nature of assets.

The long-standing standard capital allowance is known as a writing down allowance. It allows businesses to claim 18% of the tax cost of an asset as an allowance against income or corporation tax every year until disposal. Any unclaimed capital allowances can be claimed upon disposal of the equipment, in many cases the majority of any capital allowance available is not claimed until the end of the investment period. Other capital allowances can provide accelerated tax relief subject to certain conditions. One of these is the Annual Investment Allowance and the other is Full Expensing, they provide similar benefits but differ in terms of what and who qualifies.

Leasing and Capital Allowances 

Capital allowances can be claimed by the entity who is the ‘tax owner’ of the asset.

For a user (lessee) to complete their qualification as tax owner, the finance agreement must also include a provision that they can obtain title to the equipment concerned. Such agreements are commonly known as Hire Purchase.

In the case of leasing agreements where there is no provision for the lessee to acquire title, it is the leasing company who qualifies as the tax owner and who can claim any writing down allowances that are available.

What is full expensing?

Full expensing is a type of capital allowance that was announced in April 2023.It was introduced to stimulate business investment and to accelerate the rate at which capital allowances can be claimed. Subject to qualification, this allowance enables businesses to deduct 100% of the cost price of the asset from taxable profits in the year of purchase (First Year Allowance).

Full expensing can be claimed by the user when qualifying equipment has been purchased outright or is subject to a hire purchase agreement.

Who is eligible for full expensing?

There are some notable exceptions in terms of what and who qualifies for the allowance.

Full expensing is an allowance against corporation tax and is therefore not available to partnerships and sole traders, unlike Annual Investment Allowance, it is also not available for second-hand or used equipment and certain assets (e.g. cars).

A further significant exception is that, unlike writing down allowances, full expensing is not- available to a leasing company when they are the tax owner and the equipment is being used by a third party. This applies to most leasing agreements other than hire-purchase. A review, however, is currently underway with a stated intention to remove this exemption.

Extending full-expensing to leased assets should allow leasing companies to offer their customers a reduction in rental payments and therefore further help stimulate much needed business investment.

What are the benefits?

• With a current corporation tax rate of between 19% and 25%, full expensing can  reduce the cost of any qualifying capital expenditure by up to an immediate 25%.
• Hire Purchase allows the user to claim first year full expensing tax relief on the purchase price of the asset whilst spreading the cost of acquisition over a number of years.
• The OBR (Office for Budget Responsibility) has estimated that there will be a 3.5% increase in business investment in the 2024-25 and 2025-26 tax years because of this initiative.
• Full expensing encourages businesses to invest in new technology and equipment. This stimulates increased efficiency and enables businesses to make essential improvements to their productivity.

What assets does full expensing currently apply to?

IT: Computer equipment and services

Materials Handling: Warehousing and construction equipment

Office Equipment: Such as printers, chairs and desks             

Specialised Technology: Non-residential fire alarm & security systems

Commercial Vehicles: Vans and lorries.

The benefits of utilising full expensing, particularly in conjunction with leasing are substantial for businesses looking to enhance operational efficiencies and spur growth. We are experts in leasing and can help businesses, through our hire purchase agreements to implement full expensing. Contact us to learn more about how we can support your investment into business enhancing assets.