Investing in Plant and Machinery? Here's What You Need to Know About Full Expensing and the AIA

What do the Annual Investment Allowance and Full Expensing policies mean for businesses investing in plant and machinery?

In a bid to make the UK’s capital allowances regime world-leading to boost investment and drive productivity growth, the Chancellor announced in the 2023 Spring Budget that companies could claim 100% capital allowances on qualifying plant and machinery investments through the introduction of full expensing and the continuation of the Annual Investment Allowance (AIA). Marcus Quarterman, Prolectric’s Finance Director, shares his insights.

What is full expensing, and what does it mean for businesses in the UK?

Full expensing has been introduced as a new capital allowance policy. It gives companies a 100% first-year relief on qualifying main rate plant and machinery investments made between 1 April 2023 and 31 March 2026. This means businesses that make use of the full expensing policy can reduce their corporation tax by up to 25p for every £1 they invest.

Why is the UK government introducing full expensing, and how is it different from the other capital allowances schemes available?

The UK government wants to stimulate investment to help improve productivity and increase economic output. By introducing this policy, the government is hoping to encourage businesses to bring planned investment forward and make additional investments as the UK recovers from the Covid-19 pandemic.

Full expensing is being brought in from 1 April 2023 as the successor to the super-deduction. Last year, in a government-run capital allowances survey, businesses preferred full expensing over the other potential options because of its simplicity and generosity.

What sets it apart from other capital allowance schemes is its 100% first year relief and its uncapped nature. It should be a huge benefit to companies investing in new plant and machinery over the next 3 years.

How does full expensing work, and what are the conditions for qualifying investments?

Full expensing allows companies to deduct 100% of their qualifying expenditure from their pre-tax profits in the year the investment is made. It’s available between 1 April 2023 and 31 March 2026 and the 100% allowance applies to new and unused ‘main rate’ plant and machinery; it specifically can’t be used on cars, items received as gifts, plant and machinery that is leased out, integral features within buildings or ‘special rate’ pool assets.

As a relief on Corporation Tax, full expensing is only available to companies, and it can’t reduce their tax liability below zero. This does mean that unincorporated businesses won’t be able to use full expensing, but they do still have the Annual Investment Allowance (AIA) available to them.

What is the Annual Investment Allowance (AIA)?

The AIA can provide the same benefit as full expensing – an up to 25p tax reduction for each £1 invested – but there are some key differences in how it works.

How does the Annual Investment Allowance work?

The AIA allows companies to deduct 100% of their investment on qualifying plant and machinery up to £1m from their pre-tax profits in the year the investment is made.

Importantly, compared to full expensing the AIA can be applied to expenditure on second-hand assets and on plant and machinery bought to lease to someone else. It’s also available to unincorporated businesses.