Budget: Full expensing for plant and machinery
Chancellor’s plan to replace the super-deduction regime will be welcomed by businesses but will it achieve its purpose?
Chancellor’s replacement for super-deduction
On 3 March 2021, then-Chancellor Rishi Sunak announced one of the largest changes to the capital allowances regime in the past 15 years, introducing the ‘super-deduction’. This provided First Year Allowances (FYA) of 130 percent for main pool and 50 percent for special rate plant and machinery expenditure incurred between 1 April 2021 and 31 March 2023. It was available to any businesses within the scope of corporation tax, subject to a number of conditions to be met around the date of the contracts under which the qualifying expenditure was incurred and the ownership of the assets, as well as exclusions for assets provided for leasing. The Government has now decided to replace this relief, albeit at 100 percent rather than 130 percent for main pool spend. This will be a welcome relief for businesses but questions around time restrictions and lack of support for loss-making businesses could hamper the objectives of this measure.
In May 2022, a consultation was announced on the future of the capital allowances regime, which set out a number of potential options, ranging from raising the annual investment allowance (AIA) limit or increasing writing down allowance rates right up to full expensing of qualifying expenditure. While no formal response to this consultation has been published, it was widely expected that something would be introduced to replace the super-deduction.
As the deadline for the expiry of the super-deduction period loomed, no replacement had been announced, and businesses were facing the prospect of making investment plans without certainty on what tax relief would be available, against the backdrop of an increase in corporation tax from 19 percent to 25 percent.
In his Budget speech on 15 March 2023, the Chancellor finally announced a replacement for the super-deduction. Rather than providing the headline-grabbing 130 percent FYA, this provides a 100 percent FYA for qualifying plant and machinery but, given the tax rate increase, the cash value of this remains at approximately 25p per £1 of investment, the same as in the super-deduction regime.
The 100 percent FYA will apply to most plant and machinery assets. Special rate assets will continue to get 50 percent FYA, as was the case with the super-deduction regime. General exclusions will apply and, as always, the devil will be in the detail, for example it remains to be seen whether there is any similar contract timing requirement to that which applied to super-deductions. It will also be interesting to see if the Government will amend one of the quirks of the super-deduction which required ownership of the asset in the period in which the claim was made, which in many cases had the effect of excluding deposits and stage payments from the regime, without any real rationale for doing so. For expenditure which does fall outside of the full expensing regime, the AIA limit has been permanently increased to £1 million, which should soften the blow.
This full expensing relief will be available for three years from 1 April 2023 to 31 March 2026, although the Chancellor signalled an intention to make this permanent when economically feasible. Given that one of the criticisms of the super-deduction was the limited amount of time it was available and the lack of certainty for long-term investment, this slightly longer period is welcome, but it still provides limited certainty for businesses embarking on multi-year investment programmes, and industry will no doubt be keen to hear about any future extensions or replacements to this relief with a bit more notice.
Finally, there was no indication in the documents issued alongside the Budget that there will be a surrenderable cash credit option for loss-making businesses. This would have been a highly desirable option; absent this, accelerated allowances to augment losses are unlikely to promote the behaviours the Chancellor is looking for from the business community. Overall, though, this policy will be welcomed by businesses investing in plant and machinery and is likely to encourage businesses to bring forward expenditure which was on hold due to the expiry of the super-deduction.