Full Expensing and 50% First Year Allowances

From 1 April 2023, companies subject to Corporation Tax can claim significantly enhanced capital allowances on new plant and machinery. Full expensing allows you to deduct 100% of the cost of qualifying main rate assets from your taxable profits in the year of purchase, whilst special rate assets qualify for a 50% first year allowance.

Who can claim these allowances

You can claim full expensing or 50% first year allowances if:

• You are a company that pays Corporation Tax (these allowances do not apply to sole traders or partnerships)
• You incurred the expenditure on or after 1 April 2023

If you don't meet these criteria, you may be able to claim standard capital allowances instead.

What qualifies as plant or machinery

Whether an item counts as plant or machinery depends on the nature of your business. The rules around what qualifies for capital allowances remain unchanged under these enhanced schemes.

To claim full expensing or the 50% first year allowance, the plant or machinery must be:

• New and unused

The asset cannot be:

• Given to you as a gift
• A car (although other vehicles may qualify for full expensing)
• Bought to lease to someone else, unless it is background plant or machinery within a building
• Purchased in the accounting period when your business activity ceases

Background plant or machinery for landlords

If you lease out commercial property, you can claim these enhanced allowances for background plant or machinery installed in the leased buildings. Background plant and machinery are the things that make a building usable, including:

• Lighting
• Wiring
• Central heating

This list is not exhaustive—other fixtures that make the building functional may also qualify.

Full expensing vs 50% first year allowance

Which allowance you can claim depends on whether your asset is main rate or special rate plant or machinery.

Full expensing (main rate assets)

For main rate plant or machinery, you can deduct 100% of the cost when working out your taxable profits for the year of purchase. This means the full expense is relieved immediately, providing maximum cash flow benefit.

50% first year allowance (special rate assets)

For special rate plant or machinery, you can deduct 50% of the cost when working out your taxable profits for the year of purchase. The remaining 50% balance is added to your special rate pool in the following accounting period, where you can claim writing down allowances on it over time.

Note that expenditure on special rate assets may also qualify for the 100% Annual Investment Allowance (AIA), which you should consider as an alternative.

Making a claim

To claim full expensing or 50% first year allowances, you need to know:

• The accounting period of your business
• The cost of the asset, including delivery and installation charges
• How you obtained the asset (for example, purchased outright or on hire purchase)

You make your claim on your Company Tax Return. HMRC provides an online tool to help you check whether your specific assets are eligible before you claim.

Disposing of assets

If you sell or dispose of an asset that you have claimed full expensing or 50% first year allowance for, you must calculate a balancing charge. This charge must be added when working out your taxable profits, which may result in additional tax being due. The treatment on disposal differs from standard capital allowances, so it's important to consider the long-term implications when claiming these enhanced allowances.

Which scheme should you use?

For main rate assets, full expensing provides the best tax relief, allowing you to deduct the entire cost immediately. This can significantly reduce your Corporation Tax bill in the year of purchase, improving your cash flow.

For special rate assets, compare the 50% first year allowance against the Annual Investment Allowance. The AIA gives 100% relief but is subject to an overall cap, whereas the 50% first year allowance has no monetary limit but only gives half the cost as immediate relief.

Consider your company's overall capital expenditure plans, taxable profits in the current and future years, and whether you have AIA available when deciding which allowance to claim.

Sources

• Check if you can claim full expensing or 50% first year allowances

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.