Autumn Statement 2023 - Full Expensing: Invest for Less

In the Autumn Statement 2023, the Chancellor Jeremy Hunt set out plans for an investment-led UK economy designed to boost productivity, create jobs and increase growth.

As part of this, the Chancellor has announced that full expensing will be made permanent. Full expensing is the biggest business tax cut in modern British history worth over £50 billion over the next five years – helping companies toinvest for less.

Alongside the Autumn Statement, the Prime Minister outlined how the government will take five long-term decisions to grow the economy: reduce debt, cut taxes and reward hard work, build domestic sustainable energy, back British businesses and deliver world-class education.

What is permanent full expensing?

• Permanent full expensing (FE) allows companies to continuously invest for less by allowing them to deduct 100% of the cost of main rate plant and machinery from their profits before tax. There is also a 50% allowance for special rate plant and machinery.
• FE is an effective corporation tax cut worth over £50 billion over the next 5 years. For every pound a company invests in plant or machinery, their taxes are cut by up to 25p.
• This means that companies can deduct the entire cost of a new asset from their profits straight away, rather than more slowly over its lifetime.
• FE makes the UK’s plant and machinery capital allowance regime the most competitive in the G20.

Why is the government introducing this?

• The UK has the lowest headline corporation tax rate in the G7. Out of the G7 and since the introduction of the super deduction – the predecessor to full expensing – in 2021, investment in the UK has grown the fastest in the G7.
• Having the right plant and machinery is vital for businesses to grow, but it’s also a major expense. Full expensing of plant and machinery lowers this barrier to productivity by delivering upfront savings on investment, freeing up cash for businesses to invest in other things. Making full expensing permanent gives businesses the confidence and long-term certainty that they need to invest in the future.
• As part as of the wider set of measures outlined in the autumn statement, FE is expected to help unlock growth and productivity by boosting business investment by £20 billion a year and getting thousands more people into work.
• Since Spring Budget, the government has been working with industry to explore the case for extending full expensing to plant and machinery that is purchased for leasing to others. This Autumn Statement, the government confirmed it will be continuing to consider this issue and will be launching a technical consultation on draft legislation in due course.

What is plant and machinery?

• Most tangible capital assets used in the course of a business are considered plant and machinery for the purposes of claiming capital allowances. There is not an exhaustive list of plant and machinery assets. The kinds of assets which may qualify for the FE include, but are not limited to:
  • Solar panels
  • Computer equipment and servers
  • Tractors, lorries, bulldozers, vans, forklift trucks
  • Ladders, drills, cranes
  • Office chairs and desks
  • Electric vehicle charge points
  • Refrigeration units
  • Compressors
  • Foundry equipment
  • Some fixtures like kitchen and bathroom fittings and fire alarm systems

Business groups called for this, the government listened

• Over 200 companies and trade associations have now asked the government to make full expensing permanent. This includes Make UK, the Confederation British Industry (CBI), the Institute of Directors (IoD), the Institute for Fiscal Studies (IFS) and the Chartered Institute of Taxation (CIoT) who have all made public statements.
• The Confederation of British Industry said in its Autumn Statement submission:
  • “For business, where investment decisions can take years to deliver and see returns, certainty that the policy will continue beyond its current three-year window is critical ... announcing a permanent regime now will allow FE to be considered in investment plans, especially where the UK is not the only option where the investment could be made.”
• The Institute of Directors said in its Autumn Statement submission:
  • “By June 2023, our data showed this policy (temporary FE) had already had a measurable impact for those firms affected. Of organisations that have capital budgets above £1 million, around a quarter (22%) told us they have altered their investment plans as a direct result of the policy. This impact is particularly pronounced in the two government priority sectors of ‘advanced manufacturing’ and ‘green industries’ ...we call for the 100% capital expensing introduced in the March 2023 budget to be made permanent.”
• Make UK said in its Autumn Statement submission:
  • “The move towards more generous capital allowances these past few years is a positive step for manufacturers, who account for 17% of total business investment in the UK..
• The Institute for Fiscal Studies in its Green Budget (Chapter 10):
  • “The temporary nature of the full expensing policy is a problem. The UK needs an investment-friendly tax system for the long term, not just for the next three years. If the policy ends up being temporary, it will have a significant cost but little or no effect on the UK’s long-run capital stock ... Our view is that making the current policy permanent would be preferable to letting it expire – but this is a finely balanced judgement."
• When FE was announced at Spring Budget 2023 the Chartered Institute of Taxation:
  • “As well as increasing incentives for business, FE will be a welcome simplification. It gives the greatest simplification to the business tax system out of all the options considered by the government in their consultation last year.”

History of the super-deduction and full expensing

In March 2021, the former Chancellor announced the super-deduction, the biggest two-year business tax cut in modern British history, under which companies saved up to 25p in each pound they invested. Then at Spring Budget 2023, the now Chancellor introduced full expensing, a three-year capital allowances policy which also delivered up to a 25p saving for every £1 invested.

To provide certainty, when announcing full expensing, the Chancellor was clear that his ambition was to make it permanent when fiscal conditions allowed.

Today, the Chancellor has delivered on this by confirming he will make full expensing permanent. Worth over £50 billion over the next five years, full expensing is the biggest business tax cut in modern British history.

Existing relief for companies: introduction to capital allowances

• Capital allowances let taxpayers write off the cost of certain capital assets against taxable income. They take the place of accounting depreciation, which is not normally tax deductible. Businesses deduct capital allowances when computing their taxable profits.
• In translating its accounting profits into taxable profits, a business is usually required to ‘add back’ any depreciation but can instead deduct capital allowances.
• For example, a corporation tax paying company with accounting profits of £1,000, depreciation expense of £200 and total capital allowance claims of £300 would make the following adjustment:
  • Add £200 (depreciation expense) to £1,000 (accounting profits) = £1,200
  • Deduct £300 (capital allowances) from £1,200 = £900 (taxable profits)
  • Apply the appropriate tax rate, e.g. corporation tax at 19%: £900 x 19% = £171 tax due
• The main types of capital allowances are:
  • Annual Investment Allowance (AIA) - £1 million per year that is available for all businesses;
  • First Year Allowances (FYA)  – available in the first year that the equipment was purchased covering plant and machinery;
  • Writing Down Allowances (WDAs)  – available year on year covering plant and machinery; and
  • Structures and Buildings Allowances (SBA) - covering the construction and renovation of non-residential structures and buildings.

Full expensing– examples of businesses investing for less

Example one

• A high-tech manufacturing company investing £100 million in machinery in establishing a new factory to manufacture computer parts.
• Under permanent full expensing the company can invest for less by writing off all £100 million of expenditure in the year incurred, reducing their Corporation Tax (CT) bill by up to £25 million that year.
• Without FE, they would have to write down more gradually at the rate of 18% a year, reducing their first-year CT bill by up to £4.5 million (25% of the £18 million deduction from taxable profits). It would then take at least 11 years for their remaining £82 million of expenditure to be written down by 90%

Example two