Hailed as the “Greatest Tax Break in History” when it was introduced in 2021, the 130% Super Deduction aimed to take some of the sting (and the negative headlines) away from the hike in Corporation Tax rate that was announced in the same speech.
Sadly unlike the CT increase, it was only ever going to be temporary. Its replacement, Full Expensing (FE), took over in April 2023 as a slightly less headline-grabby 100% First Year Allowance.
In simple terms, “Full Expensing” means that if a company buys a qualifying asset, the full cost of that asset can be deducted from its taxable profit. You may spot that the change from Super Deduction to Full Expensing isn’t nearly as significant a downgrade as it may seem. In cash terms, 130% relief at a tax rate of 19% is pretty much identical to 100% relief at 25%.
In effect, the cost of the investment is reduced by a quarter.
An alternative way of looking at it is that the payback period for the investment is reduced.
Alongside the 100% first year allowance for main pool plant, the FE regime continues the 50% first year allowance for Special Rate Pool plant that was introduced alongside Super Deduction.
Both are considerably more helpful for cashflow than the 18% relief that preceded Super Deduction, or 6% for Special Rate assets. Both of these reducing-balance Writing Down Allowances remain in place for some assets, for some expenditure, and for some tax payers.
When FE was first announced, it was – like Super Deduction – only a temporary measure, but with the important promise that there was an ambition to make it permanent when economic conditions permitted. This permanence was confirmed in Jeremy Hunt’s final Budget in Autumn 2023.
Obviously there’s been a lot of water under Westminster Bridge since then, and when it comes to the new government’s first Budget in October, all bets are off for most taxes. Back when she was in opposition however, Rachel Reeves did indicate an intention to retain the Full Expensing regime.
It deserves to survive – these tax breaks were designed to operate as an economic stimulus to stabilise the economy in the aftermath of Covid, and were prolonged to cushion the economic shock of the conflict in Ukraine. The UK is still feeling the effect, so the underlying drivers haven’t gone away.
Fundamentally, businesses need certainty and predictability when preparing investment appraisals and financial models. When we listen to next month’s Budget speech we are hopeful that for once, Capital Allowances will be left alone.