Of the business tax measures officially announced as part of the Autumn Statement 2023, one of the more ostentatiously trailed beforehand by a Government keen to recapture its reputation for being pro-enterprise and low-tax was the making permanent of “full expensing”. What follows is a very brief history for the uninitiated but interested.
The UK corporate tax regime does not generally allow deductions for depreciation of tangible fixed assets. Instead, a complex and ever-changing regime of so-called “capital allowances” are given for certain kinds of capital expenditure - at differing rates, and subject to various conditions. The most widely claimed allowances are for plant and machinery, which despite the industrial-sounding label does include equipment and kit commonly found in offices and in leisure and retail businesses, as well as certain systems fitted within buildings such as central heating or air conditioning. Allowances are generally given on a reducing balance basis of 18% per annum, with a lower 6% rate for certain items such as longer life assets.
In order to stimulate the economy out of its pandemic-induced slump, the then Chancellor (now Prime Minister) Rishi Sunak introduced, from April 2021, the “super-deduction” for plant and machinery. For expenditure that would otherwise have qualified for allowances at the 18% annual rate, businesses could now claim an impressive 130% allowance in the first year - provided that the business was incorporated, incurred the expenditure on new (rather than used) items, and didn’t use those items for leasing. For such items that would qualify at the 6% rate, a 50% up-front deduction was allowed.
The super-deduction expired in April 2023 and, whilst popular, was too expensive to continue – particularly with the headline corporate tax rate increasing (at the same time) from 19% to 25%. Rather than reverting straight back to the reducing balance rates, the current Chancellor Jeremy Hunt announced that “full expensing” – essentially, reducing the 130% allowance to 100% (and retaining the 50% level) – would come in, until April 2026. This change was brought into law earlier this year.
The core of the Autumn Statement 2023 announcement was that the April 2026 expiry date would be removed, putting full expensing on a permanent footing. It was also revealed that the Government will consult on extending full expensing to assets used for leasing, and on simplifying the capital allowances regime generally. This positive news is, however, tempered by the consideration that the cost of full expensing is set to rise to over £10 billion per year after the original 2026 cut-off, causing one to wonder whether the Government in power at that time might be tempted to take another look.
A lawyer’s plea by way of a concluding footnote: if the change is intended to be permanent, then let’s have it enacted properly. When the super-deduction was introduced, the Capital Allowances Act 2001 – the legislation containing the main provisions dealing with capital allowances, and where one would reasonably expect to see this sort of change – was not itself amended. Instead, the Finance Act 2021 (which brought in the super-deduction) provided that the 2001 Act was to be read as if it contained the super-deduction provisions, which were themselves contained only in the 2021 Act. The UK tax code is tricky enough to follow without making important changes through these “soft” amendments, which are entirely undetectable from the face of the legislation that one would naturally be looking at. The full expensing provisions were enacted in the same way. This approach might be explicable (if not exactly justifiable) on the basis that the super-deduction was, and full expensing was originally intended to be, a temporary measure – but a permanent change surely requires a proper amendment.