The Budget 2023 –  changes to tax relief of capital expenditure

While there was little of real interest for farmers in the Spring Budget, there was a big announcement regarding tax relief known as “full expensing”, which will offer some businesses more tax relief when purchasing machinery and equipment.

To replace the super deduction tax relief, companies will be able to claim 100% relief on qualifying capital expenditure, such as IT equipment and plant and machinery, without any cap for the next 3 years. 

However, looking at the detail, not all farming business will benefit, and in some cases, this will merely result in a tax deferral rather than an absolute saving of tax.

Capital expenditure current position

• Most businesses can claim £1 million of Annual Investment Allowance (AIA) on the purchase of all plant and machinery.
• There is a separate category of equipment known as integral features which are fittings within a building such as electrics, water, air conditioning and ventilation costs in a new building. 100% AIA can be claimed on Integral features, but if the amount exceeds the AIA limit, only 6% can be claimed each year.
• Farm businesses operating via a company can currently claim a super deduction, which gives tax relief on 130% of expenditure. This was always intended to be a temporary relief, which ends on 31 March 2023.
• Companies currently pay 19% Corporation Tax so by claiming super deduction, will get an effective rate of tax of almost 25%.

New full expensing tax relief 

• There is no change for businesses operating via a partnership. Few farming businesses spend more than £1 million in the same accounting period so can continue to claim 100% relief via an AIA claim.
• The standard rate of Corporation Tax is increasing to 25% but Companies with a taxable profit of up to £50,000 will remain at 19%. The marginal rate on profits between £50,000 and £250,000 is now 26.5%.
• Full expensing is being introduced from 1^st April 2023, which will allow companies to claim 100% tax relief on an unlimited amount of expenditure on plant and machinery. This scheme is initially for a three-year period, but the Chancellor stated that the intention is for it to become permanent.
• Full expensing is not available on integral features within a new building, but instead a 50% first-year allowance is available for companies, with the balance given via a 6% writing down allowance in future years.
• Full expensing only applies to the purchase of new plant and machinery. This contrasts with AIA which can be claimed on the purchase of second-hand equipment.
• If equipment is sold on, for which full expensing has been claimed, the full proceeds will be added to the taxable profit of the company in the year of sale.
• All farmers need to remember that a large tax bill can arise when a business ceases and machinery is sold. If 100% relief is given when assets are purchased, large balancing charges will arise when the business ceases.

While the Chancellor’s announcement of unlimited 100% tax relief for companies purchasing plant and machinery sounded generous, this will only benefit large businesses as there is already the £1 million AIA available. This applies to sole traders, limited companies and partnerships, though there are rules around multiple businesses to consider.