Starting from 1 April 2023, businesses have the option to claim full expensing or a 50% First-Year Allowance (FYA) on qualifying plant and machinery. Here’s a breakdown to help you determine which option is applicable and how to make the most of these allowances:

Full Expensing

Overview: Full expensing allows companies subject to Corporation Tax to claim a 100% capital allowance on qualifying “main rate” plant and machinery assets. This means the entire cost of the asset can be deducted from taxable profits in the year of purchase.

Eligibility:

• Type of Business: Available only to companies subject to Corporation Tax.
• Qualifying Assets: Includes various types of plant and machinery such as:
• Machines: Computers, printers, lathes, planers.
• Office Equipment: Desks, chairs.
• Vehicles: Vans, lorries, tractors (cars are excluded).
• Warehousing Equipment: Forklift trucks, pallet trucks, shelving, stackers.
• Tools: Ladders, drills.
• Construction Equipment: Excavators, compactors, bulldozers.
• Fixtures: Kitchen and bathroom fittings, fire alarm systems in non-residential properties.

Benefits:

• Tax Savings: For every pound invested, the company’s taxes are reduced by up to 25p. This can significantly improve cash flow and reduce tax liabilities in the year of purchase.

Application:

• HMRC Decision Tool: Use HMRC’s online decision tool to check if you can claim full expensing or if you need to consider the 50% FYA. The tool is available at HMRC Decision Tool.

50% First-Year Allowance (FYA)

Overview: If an asset does not qualify for full expensing, it may still be eligible for a 50% first-year allowance. This means you can claim 50% of the cost of qualifying “special rate” expenditure in the year of purchase.

Qualifying Assets:

• Special Rate Expenditure: This typically includes items such as:
• Long-Life Assets: Assets with an expected life of 25 years or more.
• Integral Features: Systems that are integral to a building such as electrical systems, heating, ventilation, and air conditioning.
• Environmental Equipment: Assets like solar panels and certain other energy-efficient equipment.

Benefits:

• Tax Relief: Although not as generous as full expensing, the 50% FYA still provides significant upfront tax relief and helps manage cash flow.

Annual Investment Allowance (AIA)

Overview: The AIA provides a 100% tax deduction on qualifying plant and machinery expenditure up to £1 million per year. This applies to both incorporated and unincorporated businesses (including partnerships).

Benefits:

• Broad Applicability: AIA can be used in conjunction with full expensing or FYA, but the combined claim is subject to the AIA limit of £1 million.

Application:

• Claiming: Ensure you claim AIA in your tax return and ensure it doesn’t exceed the annual limit. For expenditure over the AIA limit, full expensing or 50% FYA may be applicable.

Steps to Take

1. Determine Eligibility: Use HMRC’s decision tool to check if full expensing or 50% FYA applies to your expenditure.
2. Track Expenditure: Maintain accurate records of all plant and machinery purchases to support your claims.
3. File Claims: Include claims for full expensing or FYA in your tax return. For AIA, ensure you apply the deduction appropriately.
4. Consult Professionals: For complex situations or high-value purchases, consult with a tax advisor to optimise your tax relief and ensure compliance.

Summary

Full Expensing provides a 100% deduction for qualifying plant and machinery assets, enhancing immediate tax relief and cash flow for companies. If an asset does not qualify, a 50% First-Year Allowance is available for special rate expenditure. Additionally, the Annual Investment Allowance offers a 100% deduction on qualifying plant and machinery up to £1 million per year. Use HMRC’s online decision tool to navigate these options and consult with a tax professional to ensure the most advantageous tax position for your business.