Budget 2023: Capital expensing

The Treasury have announced a number of changes to the capital allowances rules that are perhaps designed to make eye-catching headlines but which, in reality, amount to little more than maintaining the status quo for the majority of businesses. 

Annual Investment Allowance

The current rules allow most businesses (whether trading as a company, partnership or sole trader) to deduct up to £1,000,000 of capital expenditure on qualifying plant and machinery against their taxable profits by claiming their Annual Investment Allowance (AIA). It was announced in the Autumn statement that the £1,000,000 is intended to be the new permanent limit, rather than it reducing to the £200,000 that was previously announced.  

Full expensing of capital expenditure

The Chancellor has today announced a temporary measure to allow companies to fully deduct the cost of certain plant and machinery (or 50% if the expenditure falls into the “special rate” category of plant and machinery). This is in addition to the AIA and is expected to last for an initial period of 3 years until March 2026.   

This scheme replaces the current “super-deduction” scheme that expires on 1 April 2023, which allows companies to deduct 130% of the cost of qualifying plant and machinery (or, again, 50% if the expenditure fell into the “special rate” category of plant and machinery). 

While the change may appear to be a reduction in the benefit, from 130% to 100% of expenditure, this reduction is balanced against the general increase in the main rate of corporation tax. So, for a company paying the full corporation tax rate of 25% from 1 April 2023, expenditure of £100 would have generated tax relief of £24.70 (£130 x 19%) prior to 1 April 2023 and will now generate tax relief of £25 (£100 x 25%) from 1 April 2023. 

The expensing of capital expenditure does not apply to all asset types. The scheme only applies to items that are “unused and not second hand” and also has the usual exclusions that apply to all first year allowance – mainly cars and items for leasing. It should also be noted that while the AIA applies to almost all businesses, the expensing of capital costs can only be claimed by companies. 

Investment zones

The Chancellor announced the launch of a refocused Investment Zones programme aimed at the regeneration of areas in the Midlands and North of England, Scotland, Wales and Northern Ireland. These areas will benefit from tax reliefs as well as other fiscal support. In particular, companies investing in an Investment Zone will qualify for a 100% deduction for expenditure on plant and machinery together with a 10% annual deduction in respect of the cost of non-residential structures and buildings within the Zone. 

These tax reliefs on capital expenditure are part of a package of tax incentives including relief from SDLT, Business Rates and Employer National Insurance Contributions for businesses within the Investment Zones. 

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