Autumn Statement 2023 - Capital allowances and full expensing

In his 2023 Spring Budget, the Chancellor sought to boost investment through changes to the capital allowances regime, including the introduction of full expensing relief effective from 1 April 2023. This was originally introduced as a temporary measure due to expire on 31 March 2026. In his Autumn Statement, the Chancellor announced that he was making the relief permanent.

Rules for full expensing

Full expensing allows companies to claim 100% of the cost of certain plant and machinery against profits in the year of expenditure. This applies to spending on plant and machinery which goes into the capital allowances main pool. This excludes cars and items classed as integral features within buildings or special rate pool assets such as certain long-life assets. The amount of expenditure which qualifies for 100% full expensing relief is uncapped.

Expenditure on integral features or other special rate pool assets instead qualifies for first-year allowances at a rate of 50%, effective from 1 April 2023. Again, this rate of relief has now been made permanent. The remaining balance of the expenditure will be written off at a rate of 6% per year.

Full expensing and the 50% first-year allowance will continue to only apply to companies. Partnerships and trading LLPs, and sole traders, will continue to claim allowances under the present rules including the Annual Investment Allowance.

Interaction with Annual Investment Allowance

In his 2022 Autumn Statement the Chancellor had set the Annual Investment Allowance (AIA) ceiling at £1m permanently. As the AIA applies to both main pool assets and special rate assets today’s announcement will only apply in effect to companies spending in excess of £1m a year on capital equipment etc, although this £1m ceiling needs to be shared between companies within a group and companies under common control where there are shared activities.

Summary

Whilst the Chancellor said today’s measures amounted to “the largest business tax cut in modern British history” it should be borne in mind that they are likely to be of limited benefit to many small and medium-sized enterprises who would be within the £1m AIA limit.

In reality, the positive effect of full expensing is unlikely to offset the negative impact of the increase in the headline rate of corporation tax from 19% to 25% that came into play on 1 April 2023.