Finance Bill: Another super deduction!

In the Spring Budget, the Chancellor announced full expensing (FE) for capital expenditure on plant and machinery. The industry view was that this was likely to be fraught with complexity and pitfalls for the unwary, much like the super-deduction (SD) which preceded it. The big surprise in the Finance Bill was how scant the FE legislation was, meaning the relief should apply broadly, providing much needed support for businesses investing in their UK operations. Since FE was designed as a replacement of the SD regime (while the 130 percent headline relief reduced to 100 percent for FE, this was matched by the corporation tax rise), the expectation when it was announced was that many of the conditions which applied to SDs would be replicated for FE. However, based on the draft legislation, FE appears to be a simpler system and should allow businesses to obtain the value on offer without all of the complexity of the SD regime.

In assessing the scope of FE, it is instructive to compare it to the SD regime which ran from April 2021 to March 2023.

Starting with what hasn’t changed from SDs, FE still applies to companies within the charge to corporation tax only (including corporate partners within partnership structures). 

Special rate expenditure will still attract a lower rate of 50 percent first year allowance with the balance attracting relief at the standard six percent writing down allowance rate. General exclusions for first year allowances still apply, with an exception to the leasing exclusion for background plant and machinery meaning landlords should still be able to claim FE. Software claims should still be available where the expenditure is elected out of the intangibles regime. Finally, assets on which FE is claimed will still need to be tracked as disposals trigger a balancing charge in the same way as SD expenditure did.

However, unlike the SD, there is no requirement for expenditure to be incurred under a contract entered into after a particular date, meaning any qualifying expenditure incurred between 1 April 2023 and 31 March 2026 will potentially benefit, including expenditure incurred under contracts entered into prior to 3 March 2021 which fell outside of the contract date window for SDs. This removes a key evidentiary and record-keeping barrier for companies wishing to claim FE compared to SD, and also makes claims for expenditure where the contract date is not clear less contentious.

Another change from SD is that there is no narrowing of the definitions in CAA2001 s.67 which allow taxpayers to treat expenditure as owned by them “providing that they shall or may become the owner of the plant or machinery on the performance of the contract”. This removes the arbitrary distinction under SDs which denied relief on stage payments made in periods in which the plant and machinery was not yet owned (for example deposit payments) which meant the outcome could be different for different companies depending on their year-end dates.

While specific anti-avoidance provisions have been introduced, these are not over-broad, so genuine commercial expenditure should be eligible. There is no requirement to claim FE if a taxpayer feels it would be more beneficial to claim standard writing down allowances in respect of some or all of their qualifying expenditure.

While this is only the draft legislation, and we saw with the SD legislation that amendments can be made prior to Royal Assent, FE appears to be broadly drawn and generous in scope, removing some of the hurdles which handicapped the SD regime. By doing this, FE stands a good chance of achieving the Government’s ambition of encouraging businesses to invest.