Spring Budget 2023: Capital Allowance changes for businesses

Aileen Scott

Aileen Scott

Tax Partner

One of the key changes announced today was the introduction of Full Expensing for qualifying capital expenditure. This measure is effective from 1 April 2023 to 31 March 2026 and provides a 100% deduction for unlimited capital expenditure on IT and plant & machinery. Its introduction coincides with the end of the Super Deduction which gave a 130% deduction for qualifying new capital spend. 

Often when the capital allowance provisions change there can be an advantage to acting promptly before the change or indeed sometimes delaying capital expenditure until after a change in order to maximise the tax saving generated.

For companies that will be small in 2023 (profits below £50,000), it may well be beneficial to accelerate qualifying capital expenditure to ensure it is incurred by 31 March 2023 to benefit from the 130% deduction. 

However, for companies that will suffer the main rate of corporation tax, which increases to 25% from April, there is little benefit in advancing the expenditure where it will fall within the Full Expensing provisions. This is because a 100% deduction against a 25% corporate tax rate is of similar value to a 130% deduction against a 19% rate. 

Care needs to be taken where expenditure post April 2023 would move a company’s profits to fall between £50,000 and £250,000 such that marginal relief then applies. The effective tax rate in the margin is 26.5% and therefore in circumstances like this it can be better to advance the expenditure to the pre-April 2023 period to obtain the 130% deduction and to have the post April 2023 profits fall within the main rate of corporate tax i.e. 25%.

Full expensing does not apply to expenditure which qualifies at the special rate which may still benefit from a 100% deduction via the Annual Investment Allowance or the 50% First Year Allowance which was extended for a further three years.     

These measures provide valuable relief and together provide a degree of stability and for most businesses avoids a cliff edge decision on the timing of expenditure.  

The key takeaway from this is that businesses need to carefully consider the timing of their expenditure ahead of the changes in April 2023 as there is not a one size fits all solution to maximising the relief available.

Get in touch

Read the rest of our Spring Budget analysis on our Budget Hub, and for more information or to discuss any of the announcements, please don't hesitate to get in touch with me or your usual Johnston Carmichael contact.

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