Full capital expensing: what you need to know

British Chancellor, Jeremy Hunt, announced that the full capital expensing scheme for plant and machinery will be made permanent in his Autumn Statement.

GDP is expected to rise by 0.9%, investment by 1.5%, and wages by 0.8% as a result of this scheme.

What is full capital expensing?

Full capital expensing offers companies the opportunity to obtain tax relief for the full cost of certain capital expenditures in the year it is incurred. This tax relief is intended to encourage companies to invest in capital assets for development and is available to UK businesses of all shapes and sizes.

This initiative allows companies to deduct 100% of the cost of qualifying capital investments, including plant and machinery and other items. Qualifying items could include assets such as computers, office furniture, security systems, and manufacturing machinery.

It is important to remember, however, that the focus of the full capital expensing initiative is on purchasing new and unused qualifying plant and machinery. However, certain ‘integral features’ and ‘long-life items’ (assets in the former 6 per cent pool) are subject to a 50 per cent first-year deduction instead. All second-hand equipment is not eligible for this tax relief scheme.

The benefits of the full expensing scheme

1. Enhanced cash flow

Full capital expensing frees up funds for other investments or operational needs because the immediate deduction decreases a business’s tax liability. Positive cash flow also allows a company to pay off debts, reinvest in itself, return money to shareholders, pay expenses, and safeguard itself against future financial difficulties.

2. Increased investment in capital assets

The policy encourages greater investment in capital assets while providing more immediate tax benefits. It enables businesses to invest in more dependable and efficient machinery, resulting in long-term cost benefits.

Future impact of the full expensing scheme

By encouraging businesses to invest in main-rate plant and machinery beyond the Annual Investment Allowance (AIA), the scheme prevents beneficial investments from being discouraged by tax liabilities, in turn accelerating the growth of the UK economy.

According to model simulations by the Tax Foundation and the Centre for Policy Studies, the scheme’s economic gains and budgetary costs will continue to boost GDP, investment, and wages in the long run, although this may be limited due to the restriction on qualifying assets to the 18% pool.

Even with this pool, the Office for Budget Responsibility (OBR) still predicts a significant increase in business investment of approximately £3 billion yearly.

If you want to learn more about Full Expensing or need help filing a claim, please contact a member of our team today.