As part of his Spring Budget statement, Chancellor of the Exchequer Jeremy Hunt announced plans to extend capital allowance full expensing to purchases of equipment for lease and hire purposes.
What will this mean for businesses, and who will benefit?
What is full expensing?
Full expensing is accountant speak for 100% capital allowance tax deductions. Or, in other words, being allowed to deduct the full cost of certain investments and purchases from taxable profits before Corporation Tax is calculated.
The government initially introduced full expensing as a temporary measure to encourage businesses to keep making capital purchases as the economy flagged. But it was soon made permanent in the 2023 Autumn Statement.
Under the scheme, companies can write off the full cost of qualifying purchases in the same tax year the investment is made. This is known as a ‘first year’ allowance. Based on the current rate of Corporation Tax, it in effect gives firms a 25% reduction on the cost of their investment.
Purchases that qualify for full expensing are those that relate to plant and machinery, which the government defines as “most tangible capital assets, other than land, structures and buildings,” with certain exceptions. More specifically, the allowance covers most types of workplace equipment and machinery, including IT, office, maintenance and construction equipment. It also covers commercial vehicles other than cars.
What does the extension to leased assets mean?
One major exemption from the original full expensing rules was that it didn’t apply to investments in plant and machinery purchased with the intention to rent or lease them out. This drew criticism almost as soon as the policy was introduced last spring, with major trade organisations such as BCC, Make UK and the CBI all making representations to the Treasury as to why capital expenditure by hire companies should be included.
This wasn’t just a chase of industry heavyweights wanting to see a level playing field for all. For tens of thousands of businesses, equipment hire represents a more affordable and viable alternative to purchasing directly. Sectors ranging from events to construction to large sections of the logistics industry rely on it.
The rationale of the original policy was that firms that use capital investments in plant and machinery for direct commercial gains shouldn’t benefit from the same tax breaks. But by leaving rental firms out, it has a knock on effect much further down the line. Replacement and renewal of ageing assets slows, quality and reliability of available stock gradually deteriorates, and smaller businesses in particular that cannot finance their own equipment purposes come to be at a disadvantage because they have reduced access to the latest technology.
The change of course by the Chancellor has been framed as ‘righting an injustice’ in the original policy. However, hire firms looking forward to getting a 25% tax bonus on the next renewal of their stock may have to wait a while. The Chancellor gave the caveat that the changes would be introduced “when they are affordable”, without any further detail about when that might be, and are subject to new legislation being passed.
