Capital allowance is a relief that business can claim for the use of certain kinds of assets. The amount of relief is certain percent of the cost of such asset.
Usually, capital allowances can be claimed for the assets but not for building (unless it is a commercial property where structural and building allowance applies).
There are two types of allowances :
- One off (first year) claim for the initial year of purchase (50% to 100% of the purchase price)
- Subsequent yearly claims (different rates- generally 6% or 18%)
Introduction to Full Expensing and FYA
Usual rates of capital allowances (6% or 18% per year) take several years to get relief for the total amount invested in a particular asset.
However, full expensing and 50% FYA are the capital allowances that allow immediate tax relief. Whole or half of the cost can be claimed right in the year of purchase (no need to wait for several years to recover full investment).
These reliefs are available only for companies (not for sole traders and partnerships) and only when assets purchased between 1 April 2023 to 31 March 2026. As almost all companies invest in assets, they should understand these rules and must not miss the opportunity to save tax.
Full Expensing
As per full expensing, assets that would get a yearly capital allowance of 18%, can now benefit from 100% relief.
For example, a server bought for £8,000 allows you to deduct the whole £8,000 from taxable profit.
Below table shows that, claiming under main rate of 18%, even after three years, only £3,589 (out of £8,000) is recovered. However, claiming under full expensing, whole of £8,000 was claimed within the first year.
Claim Under Full Expensing
|
Period |
Yearly claim |
Cumulative Amount |
Balance Amount |
|---|---|---|---|
|
Year of purchase |
Whole 8,000 |
8,000 |
Nil |
|
Second Year |
– |
– |
– |
|
Third Year |
– |
– |
– |
Claim Under Main Rate of 18% (£)
|
Period |
Yearly claim |
Cumulative Amount |
Balance Amount |
|---|---|---|---|
|
Year of purchase |
1,440 (18% of 8,000) |
1,440 |
6,560 |
|
Second Year |
1,181 (18% of 6,560) |
2,621 |
5,379 |
|
Third Year |
968 (18% of 5,379) |
3,589 |
4,411 |
Assets Which are eligible for Full Expensing
Generally, most of the assets used for the business qualify. But below are not eligible:
- Cars, ships, railway assets
- Used and second-hand assets, gifted assets, assets leased to someone
- Assets transferred from connected person
- Land and buildings (structural and building allowances apply instead)
- Assets under special rate pool (discussed below)
- Assets acquired as part of arrangements which are not normal
- Assets not used or business
- Assets purchased during the accounting period when the qualifying activity ceases
How Super-Deduction Differs from Full Expensing
Super-deduction of 130% was available for investments before April 2023 but full expensing is available for assets bought onwards April 2023. Please visit our article “Capital Allowance Super Deduction: Can you claim after March 2023?” for further details.
50% First Year Allowance (FYA)
For investment in certain assets (on which full expensing is not available), there is another relief called 50% first-year allowance. For example, an escalator installed for £8,000 allows you to deduct £4,000 from taxable profit in the year of purchase.
In subsequent years, special rate of 6% on the balance amount can be claimed every year:
|
Period |
Percentage |
Claim Amount (£) |
Balance Amount(£) |
|---|---|---|---|
|
Year of Purchase |
50% FYA on 8,000 |
4,000 |
4,000 |
|
Second Year |
6% Special Rate on 4,000 |
240 |
3,760 |
|
Third Year |
6% Special Rate on 3,760 |
226 |
3,534 |
FYA is beneficial for the assets which could not be covered by Annual Investment Allowance (which allows 100% relief).
Assets Which are eligible for 50% FYA
This relief is available in the assets coming under special rate pool. The assets under this pool are:
- Parts of a building considered integral – known as ‘integral features’ (lifts, escalators, moving walkways, air conditioners, coolers, lighting, and power systems etc)
- Long life assets (assets lasting for more than 25 years) purchased for £100,000 or more
- Solar panels
- Thermal insulation added to a commercial building or Furnished Holiday Letting
Assets Which are excluded for Claiming 50% FYA
In some conditions, there is restriction on claiming 50% FYA. Used and second-hand assets, gifted assets or assets transferred from connected person and assets leased to someone are not eligible for claiming 50% FYA even when they fall under special pool rate.
Relief You Can Claim Under Full Expensing and 50% FYA
The relief depends on the cost of asset and the rate of corporation tax. For example, if the cost is £10,000 and the company pays corporate tax at 19%:
- full expensing will provide relief of £1,900 (i.e., 19% of £10,000)
- 50% FYA will provide relief of £950 (i.e., 19% of £5,000)
Potential Pitfalls When Claiming Full Expensing and 50% FYA
If you plan to buy something towards the end of the company’s year-end, better not to delay.
Suppose you consider buying an asset in December 2023 (which is your company’s year-end).
Buying within December, you can claim relief immediately after December. If you buy on 1st of January 2024, then you can claim relief only after December 2024 (your company’s year-end). So, one day delay in buying delays the relief by one year.
Disposal of Assets on Which Full Expensing/FYA has been Claimed
Upon selling an asset on which full expensing was claimed, an immediate balancing charge equal to 100% of the disposal value applies. Claiming full expensing and then selling an asset for £10,000 will increase taxable profit by £10,000.
Upon selling an asset on which 50% FYA was claimed, immediate balancing charge of 50% of the disposal value arises. The remaining balance of 50% is treated in the normal way so is deducted from the special rate pool balance. Claiming 50% FYA for an asset and then selling it for £10,000 will increase their taxable profits by £5,000.
Frequently Asked Questions
How Do Full Expensing And 50% FYA Differ?
Full expensing provides relief for 100% of the cost while 50% FYA provides relief for the half of the cost. Similarly, 50% FYA is available on assets under special rate pool while full expensing is available in assets other than those (except for excluded assets).
Who Is Eligible For Full Expensing And 50% FYA?
Only the companies (not the sole traders and partnerships) are eligible for full expensing and 50% FYA.
What Is The Time Frame For Claiming Full Expensing And 50% FYA?
The time limit for claiming full expensing or 50% FYA is usually two years from the end of the accounting period (FA 1998, Sch. 18, para. 82).
Can I Claim Full Expensing And 50% FYA For Second-Hand Assets?
No. To qualify for relief, assets purchased must be unused. Second hand assets are eligible for Annual Investment Allowance.
How Do I Claim Full Expensing And 50% FYA On My Tax Return?
While filing your company’s tax return, you need to go to the “capital allowance” section where you can claim full expensing or 50% FYA.
Summary
- Both the full expensing and 50% FYA apply only for the companies and for assets purchased in the period April 2023 to March 2026
- Assets must be new and unused (car is not eligible even if new)These allow companies to claim 100% or 50% relief right in the year of purchase
- 50% FYA is available for assets under special rate pool (e.g., lighting, heating, solar panels, lifts, escalators etc)
- Full expensing is available for assets other than the ones under special rate pool. Most of the asset come under this (e.g., computer equipment, vehicles other than car, furniture, forklift trucks, pallet trucks, shelving and stackers, tools like ladders and drills, excavators, compactors, kitchen and bathroom fittings in non-residential properties etc.)
