Spring Budget 2023’s full expensing: what limited company directors need to know

In last week’s Spring Budget 2023, the capital allowances regime was well and truly placed in the spotlight. But what does the announced ‘full expensing’ mean for contractors?

Here, exclusively for ContractorUK, I will break down the implications of chancellor Jeremy Hunt’s new policy for those running their own limited company, writes Christian Hickmott, managing director of Integro Accounting.

What does HM Treasury’s Red Book say about capital allowances?

On Wednesday March 15th 2023, Hunt announced that ‘full expensing’ will take effect for limited companies from April 1st 2023, meaning that up until April 1st 2026, limited companies will be able to deduct 100% of the cost for qualifying purchases from their profits in the first year.

The percentage of capital allowance tax relief can vary dependent on the qualifying asset.

For example:

• 100% full expensing on brand new, qualifying assets.
• 50% first year allowance on new ‘special rate’ assets.
• 100% first year relief (Annual Investment Allowance – AIA) for plant and machinery investments up to £1million. This covers main rate items that do not qualify for full expensing.
• Writing Down Allowance (WDAs) – rates are set at 18% and 6%.

What items qualify as ‘qualifying assets’?

Qualifying assets include plant and machinery. These are items that would be capitalised on your company balance sheet. There is no cap on the amount of spending, only on the type of spending. Plant and machinery include – but are not limited to – the following:

• Machinery - Computers, printers etc.
• Warehousing equipment - Forklift trucks, pallet trucks, shelving and stackers.
• Tools - Such as ladders and drills.
• Office equipment - Desks and chairs.
• Commercial vehicles - Vans, lorries, and tractors – limitations apply to cars.
• Construction equipment - Excavators, compactors, and bulldozers etc.
• Some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property.

We would always recommend contractors speak to an accountancy professional if unsure whether the items in consideration are eligible for full expensing.

Full expensing versus the previous ‘super deduction’

The new changes will replace the previous ‘super deduction’ allowance introduced back in 2021.

Previously, it was possible to claim 130% of the cost for ‘qualifying assets’. So, someone purchasing a new van for £30,000 would have seen their taxable profit reduced by £39,000. This super deduction will come to an end on March 31st but be replaced by this new full expensing, under which contractors can claim 100%.

How will full expensing impact limited companies, financially?

For limited companies who have a taxable profit of £250,000 or more, they will not see much change compared to the super deduction that was in place from 2021.

However, smaller companies, particularly those with profits below £50,000, will see the effect of the capital purchases return to the same as it was when claiming the Annual Investment Allowance (AIA).

What may affect smaller limited companies is the additional first year deduction available on “special rate” assets that do not qualify for full expensing. This means that the written down allowance in the first year will be 50%, instead of the usual 6%. This can be particularly useful if you are looking to purchase a new car, but do not want to buy a fully electric vehicle.

For special rate items, someone buying a new petrol or diesel vehicle for £30,000 would have seen their taxable profits reduced by £1,800 in the first year. This will now be £15,000. This also covers used electric cars.

How contractors can benefit from full expensing and the first year 'special rate saving...

Case study

Just A. Nother Ltd spends £50,000 this year on machinery. Of this, £25,000 is brand new and qualifies for full expensing, with the remaining £25,000 qualifying for the AIA. If their pre-Capital Allowance profit was £100,000, their tax computation would look like:

Pre-CA profit                                      £100,000

Capital allowances:                            
Full expensing                                   £25,000                                   
AIA                                                     £25,000

Taxable profit                                     £50,000

Corporation Tax at 19.00%                 £9,500

Let’s take another example, this time with a higher purchase price.

Example

U.R.E Average Limited buys a new non-electric vehicle costing £60,000. The pre–Capital Allowance profit is £75,000 so the company’s tax computation would look like:

Pre-CA profit                                               £75,000

Capital allowances:
Writing Down Allowances @50.00%          £30,000

Taxable profit                                              £45,000

Corporation Tax at 19.00%                          £8,550

In future years, U.R,E Average Limited would continue to get tax relief on the special rate asset pool at 6% on the reducing balance. The company has also saved further tax by reducing their profit and so reducing the overall rate at which their profits are charged.

In short...

Overall as a policy, full expensing benefits larger businesses far more than it benefits small business.

However, small businesses will see their profits act in the same way as they did when using the AIA. The real benefit being the opportunity to offset a higher amount of the cost of a non-electric vehicle, or a used electric vehicle, in the first year.

Some assets that do not qualify for full expensing will still qualify for the AIA, which has now been permanently capped at £1million a year.

Sole traders and partnerships will miss out on full expensing, but can continue to claim the AIA. However, any currently unincorporated businesses with earnings and expenditure high enough to benefit from these new capital allowances rules would be wise to look at their current set-up to see whether there would be other benefits to using a limited company, as the chancellor’s ‘full expensing’ would clearly be one.