What are full expensing capital allowances? Your detailed guide.

If you’re running a limited company and considering investing in equipment, machinery, or technology, full expensing capital allowances could make a huge impact on your tax planning. Let’s break down exactly what it means and how it could benefit your business.

What is a capital expense?

A capital expense is money your business spends to acquire, upgrade, or maintain long-term assets that will benefit your company for more than one year. These typically include physical assets like machinery, equipment, computers, furniture, and vehicles, but can also include certain intangible assets like software. Unlike day-to-day operating expenses (like rent or utilities), capital expenses are considered investments in your business’s future and are treated differently for tax purposes.

What is full expensing?

Full expensing is a tax relief that allows companies to deduct 100% of the cost of qualifying plant and machinery from their profits in the year they make the purchase, rather than spreading the deduction over several years.

Think of it as a significant discount on your corporation tax bill when you invest in assets that help grow your business. With the current corporation tax rate at 25% for many companies, this essentially means the government contributes up to 25p for every £1 you spend on qualifying equipment.

How does it compare to previous schemes?

Full expensing capital allowances effectively replaces the super-deduction scheme that ended in March 2023. While the super-deduction offered a 130% first-year allowance, it was only temporary. The key advantage of full expensing capital allowances is its permanence, allowing businesses to make long-term investment plans with confidence rather than rushing decisions to meet a deadline.

How does full expensing work?

Let’s use a practical example to illustrate the benefits.

If a business invests £50,000 in new equipment, they can deduct the full £50,000 from their taxable profits in the year of purchase, saving £12,500 in corporation tax (assuming they’re paying at the 25% rate). That’s a significant boost to cash flow at a time when they need it most.

For assets that qualify for the special rate pool (like electrical systems, lighting systems, and long-life assets), a 50% first-year allowance is available, with the balance being introduced into the special rate pool as normal. This is still a substantial acceleration compared to the standard 6% writing down allowance.

What qualifies for full expensing capital allowances?

While the scheme is wonderfully simple compared to many tax reliefs, there are some important things to know:

• Full expensing capital allowances applies to plant and machinery (not buildings, structures, or land)
• Assets must be new and unused
• The expenditure must be incurred by a company subject to corporation tax
• Cars are excluded, as are most assets used for leasing
• The claim must be made in the period when the expenditure is incurred

Many businesses miss out because they typically claim allowances only once projects are complete. Under full expensing capital allowances, you need to claim in the tax year you incur the cost.

Full expensing capital allowances across different industries

The benefits of full expensing capital allowances vary across sectors:

Manufacturing businesses can claim on production equipment, CNC machines, or automated systems, potentially saving tens of thousands in tax.

Retail businesses can benefit when investing in EPOS systems, refrigeration units, or shopfitting equipment.

Tech companies can claim when upgrading servers, network infrastructure, or specialist computing equipment.

Service businesses can benefit when purchasing office equipment, business vehicles (excluding cars), or specialist tools.

Common mistakes to avoid

Based on our experience helping clients claim capital allowances, here are some pitfalls to watch out for:

1. Missing the right accounting period – Remember that the claim must be made in the period when the expenditure is incurred, not when the project is complete

2. Connected party transactions – Purchasing assets from connected companies can invalidate your claim

3. Insufficient documentation – Always keep detailed records of purchases, including dates, amounts, and proof that assets are new

4. Overlooking installation costs – Many associated costs can be included in your claim

5. Misunderstanding “new and unused” – This typically means new to your business, but there are technical definitions to be aware of

Planning your purchases strategically

Timing is everything when it comes to tax planning. With full expensing capital allowances now permanent, you have more flexibility, but it’s still worth considering:

• If you’re planning investments across multiple years, consider the timing of expenditure (especially professional and preliminary fees)
• For companies approaching their year-end, consider whether accelerating planned purchases could reduce your current year’s tax bill
• Where possible, structure group procurement to avoid connected party restrictions
• Remember that disposing of assets can trigger a “clawback” where the proceeds become taxable

Cash flow considerations

While the tax benefits of full expensing capital allowances are significant, you still need to fund the initial purchase. Consider:

• Whether you have sufficient profits to offset against the capital allowances
• The impact on your immediate cash position
• Asset finance options that might help spread the cost while still accessing the tax benefits
• The return on investment beyond the tax savings

What about loss-making companies?

If your company doesn’t have enough profits to utilise the full allowances, you have options:

• Carrying losses back to claim a refund of corporation tax paid in previous years
• Carrying losses forward to reduce future tax bills
• For groups, potentially surrendering losses to other group companies

How does this fit with other tax reliefs?

The Annual Investment Allowance (AIA) remains available and provides up to £1 million of tax relief on qualifying expenditure each year. For many businesses, using the AIA first (particularly for special rate expenditure) may be advantageous as it has fewer restrictions and less risk of clawback on disposal.

Is full expensing capital allowances right for my business?

While full expensing capital allowances offers significant benefits, every business situation is unique. It’s particularly valuable if:

• You’re planning substantial investments in equipment, technology, or machinery
• Your business has the profits to offset against the capital allowances
• You want to accelerate tax relief to improve cash flow
• You’re looking to modernise your operations with more efficient equipment

Frequently Asked Questions

Can I claim full expensing capital allowances on second-hand equipment?

No, the assets must be new and unused.

What happens if I sell the asset later?

When you dispose of an asset that qualified for full expensing capital allowances, you must work out a balancing charge and add this when working out your taxable profits on your Company Tax Return. More details on how to calculate the balancing charge are available on the HMRC website.

Can I claim full expensing capital allowances on assets bought through hire purchase?

Yes, but special rules apply regarding when the expenditure is deemed to be incurred.

How does this work for companies with accounting periods that straddle tax years?

The eligibility for full expensing capital allowances depends on when the expenditure is incurred. For periods straddling tax years, you may need to apportion claims.

Can landlords benefit from full expensing capital allowances?

Full expensing capital allowances only applies to companies subject to corporation tax. However, landlords can still claim capital allowances through other routes.

Getting help with full expensing capital allowances

Capital allowances can be complex, especially when considering the interaction with other tax reliefs and your overall business strategy. Getting professional advice before making major purchases can ensure you structure investments in the most tax-efficient way.

Need specific advice about how full expensing capital allowances could benefit your business? Contact Adams Accountancy today for a free, no-obligation chat about your specific situation.

Remember, as we always say to our clients – no question is too silly when it comes to understanding your taxes.