The Spring Budget 2023 delivered few surprises, and there were certainly a few significant announcements that will impact SMEs. A clear push to encourage investment saw the introduction of a new capital allowance – Full Expensing.
Full Expensing, much like the Super Deduction, is a capital allowance brought in to help encourage investment into business assets. Similarly to the Annual Investment Allowance, this offers 100% first-year relief on plant and machinery for companies that pay Corporation Tax. However, unlike the Annual Investment Allowance, this isn’t applicable for used assets and the 100% only applies to main rate assets. So it begs the question what is the point of full expensing? Basically, it enables businesses that will spend more than £1m on plant and machinery to have the benefit of first-year relief. The Annual Investment Allowance is capped at an expenditure of £1m for plant and machinery.
This is initially in place for 3 years, however, it is anticipated that this will be here to stay permanently. In simple terms, the cost of most new business assets including IT, office equipment, tools, and some fixtures, can be deducted from your taxable profit, before corporation tax is calculated. However, there are some exceptions that wouldn’t qualify for Full Expensing and the capital allowances that would apply may differ.
What does this mean for you?
Purchasing a new asset to help your business grow for £10,000 would reduce your taxable profit by £10,000. This would mean a saving in Corporation Tax of between £1,900 & £2,500 dependent on your profit.
An opportunity to reduce taxes is something that always calls for celebration, but it is likely that your cash could work harder for you in other ways, rather than being tied up in assets.
So here’s the even better news…
You can still qualify for Full Expensing if you use a finance agreement, as long as you opt for a hire purchase agreement and not a lease. Some of the key factors of a hire purchase agreement are:
- All of the VAT on the cost is payable upfront with the deposit
- An option to purchase fee (typically £150.00 plus VAT) will be collected with the last payment you make
- Capital allowance on the equipment cost (as if you had paid cash), and full tax relief on the interest payable
- The asset will still be detailed on the balance sheet as if you had paid cash
By utilising a hire purchase agreement instead of using cash reserves, you will gain all the other benefits of asset finance including:
- Immediate return on investment
- ROCE – if you know you have other uses for the money, rather than tying it up in assets the return on capital employed could counter some of the interest paid.
- If not utilised and an unforeseen bill comes in or there is a delayed payment from a customer, you may have to utilise other means such as an overdraft which would be at a higher rate
- Discounts or better rates from suppliers if payment is made immediately
- Easier budgeting – regular payments in line with other monthly expenditure
Whilst this is all great news, it is worth being aware of the caveats. The main one is what happens when a company sells an asset which it has claimed full expensing for? In simple terms, the company would be required to increase its taxable profits by the sale price of the asset before calculating tax.
Does this mean that leasing would be a better option in some cases? I am sure you will agree it is a bit of a minefield.
If you’re unsure of which capital allowance an asset would qualify for, or which agreement type is best for you, please double-check with your accountant. We are equally happy to discuss any purchasing plans with both you and your accountant taking into account your individual circumstances and longer-term plans.