Full expensing and its impact on investment strategy

Full expensing and its impact on investment strategy

We explored the new full expensing relief in our recent insight, but does it go far enough in supporting long-term business investment plans?

In a post-Brexit and post-Covid world, the UK is looking to attract businesses and having a competitive capital allowances scheme is one way of doing that. Full expensing provides an incentive for businesses to invest in capital assets, as it allows them to deduct the full cost of investment in qualifying plant and machinery, which can help with economic growth.

In addition to full expensing, the Annual Investment Allowance (AIA), which gives 100% relief for plant and machinery investments in their first year, has had its' limit permanently increased from £200,000 to £1,000,000 for expenditure incurred from 1 April 2023, which the government also hopes will encourage further investment from businesses.

Background

The full expensing scheme is effectively a three-year programme to incentivise businesses to invest by offering the ability to accelerate a number of tax savings on qualifying expenditure to help cashflow by providing a significant amount of tax relief in year one. When combined with the corporation tax increase, the full expensing relief is broadly in line with its predecessor – the super deduction.

While the three-year timeframe offers a degree of certainty from April 2023 until 31 March 2026, it could probably be argued that businesses needed a longer term incentive to offer stability. This was raised as part of the recent capital allowances consultation undertaken by the Government, which we took part in.

There was a huge rush to take advantage of claiming the super deduction and this could have been alleviated to some extent with earlier notification of its replacement. Although typically the tax saving will be similar going forward for the next three years, so there’s a degree of calm now in relation to capital allowances claims.

Getting to grips with the changes

The capital allowances regime has experienced a lot of changes over the past few years. As a result, businesses have regularly had to get to grips with new criteria and new offerings. From the introduction of structures and buildings allowances back in 2018, to the super deduction and now to full expensing. It is undoubtedly a complex arena.

Importance of planning

Now we have stability to some extent with regards to capital allowances, there’s an opportunity for in-depth planning to be done. If businesses set out their capital expenditure plans over this three-year period, they can identify areas for relief and work with a specialist advisor on maximising the incentives.

With the regular capital allowances regime changes, it has made compliance more difficult. HMRC have been increasingly reaching out to businesses to check the validity of claims, adding another dimension to the process. In-depth and proactive planning can make the credit application process easier to navigate.

The penalties for making an incorrect claim can be as much as the amount of tax that the business has attempted to claim. HMRC have a window of a year after the claim was submitted to request payment of any penalty meaning the cash may have been reinvested or spent elsewhere. This can be a drain on working capital and could jeopardise the future of a business. It’s therefore important that businesses seek the right advice to maximise their claim.

We are here to help

If you have any questions in relation to capital allowances, whether you are eligible or to discuss anything mentioned within this article, please get in touch with a member of our specialist team or your usual Azets advisor.