Budget 2024 confirmed that full expensing (including the 50% first-year allowance) is permanent for at least the remainder of the current Parliament.  It is likely that full expensing will exist for many years to come and therefore becomes an instant cornerstone of the UK capital allowances system.

The problem

When full expensing was introduced by Finance (No.2) Act 2023 as a first-year allowance, it was automatically incorporated into the long-time existing first-year allowances legislation in section 52, Capital Allowances Act 2001.  This has caused unintended consequences.

In some instances, the constraints of sections 52(1) and (2) mean that property investors, landlords and occupiers are being inadvertently denied full expensing on part or all of their property expenditure. 

Under section 52(1), full expensing is available only on expenditure incurred if the company owns the asset in the chargeable period of expenditure. 

Crucially, for property investors, landlords and occupiers, ownership of a plant and machinery assets occurs when it is installed into the property.  On large construction projects with long lead-in times, substantial upfront fees expenditure is typically incurred well in advance of the plant and machinery being installed.  Fees expenditure is incurred in a different period to the installation.  Therefore, in these instances, any fees paid in a period prior to the installation, would not qualify for full expensing.

Another instance where full expensing is sometimes denied to property investors, landlords and occupiers, is where a deposit is paid to place an order for the supply or manufacture of substantial equipment.  In most instances, ownership of the equipment is transferred from the manufacturer to the company on the delivery date.  Where the deposit payment and delivery dates are in different periods, full expensing would be denied on the deposit amount.

Meanwhile, under section 52(2), full expensing can only be claimed for the period in which the expenditure is incurred. 

Occasionally, companies will not be able, decide not to or be unaware, to claim full expensing in the period of expenditure.  Also, it will sometimes happen that the time limit for claiming full expensing will have expired.  These instances mean that full expensing is denied, even where companies meet the conditions in section 52(1). 

On large projects spanning many financial periods, it will be necessary to undertake interim capital allowances claims during the live construction stage, increasing tax compliance administration costs.

Our solution

We believe the solution to the problems highlighted is to omit section 52(2) and introduce a new permanent ‘full expensing pool’ to the capital allowances system.  Qualifying expenditure, including 50% of expenditure on special rate assets, would be allocated to the full expensing pool.  The full expensing pool would be subdivided between main pool type assets and special rate pool type assets, for subsequent Section 198 election / disposal value purposes.   

The crucial thing and the reason for introducing the full expensing pool, is that the claimant would have the flexibility to claim either the whole or any part of the amount that exists in the full expensing pool, for a chargeable period.     

The full expensing pool would operate similar to the main rate and special rate pools – by adopting sections 53 to 66 as necessary.  This would mean similar pooling and disposal rules to the main and special rate pools.  Sections 58(3) and (4) would address section 52(1) and would be compatible with the operation of the full expensing pool. 

Section 52(1) and (2) would remain for partnerships, low emission cars, electric vehicle charge points and so forth.     

We believe the benefits of a full expensing pool and operating it as outlined above, would be many and comprise:

• Ease of introduction
• Providing flexibility to companies – on when to claim and how much to claim
• Familiarity of operation – owing to prior knowledge of sections 53 to 66
• Compatible with allocating the Annual Investment Allowance, if required
• No balancing charges on disposal, in most cases
• Operate separate to the main pool, the special rate pool and single asset pools
• Compatible with section 198 elections
• No need for individual tracking – for disposal value purposes

© Smith Kelland Limited

This is for general information purposes only. It is not advice and is not intended to be advice.