Full Expensing Capital Allowances: Are you claiming correctly?

When a company invests in plant, machinery or equipment, the tax relief attached to that spend can have a direct impact on cash flow. Full expensing capital allowances allow eligible companies to bring that relief forward, reducing taxable profits in the year the investment is made rather than spreading relief over several years.

For the right type of expenditure, full expensing can reduce taxable profits (and therefore corporation tax) in the year of purchase. However, it only applies in specific circumstances and must be considered alongside the wider capital allowances rules.

What full expensing actually does

Under normal capital allowance rules, most plant and machinery expenditure is relieved gradually through writing-down allowances. A percentage of the cost is deducted each year until the full amount has been relieved.

Full expensing changes the timing of that relief.

Where an asset qualifies, the company can deduct 100% of the cost immediately in the year of purchase. The total relief available does not increase — it simply arrives sooner.

To qualify, the expenditure must:

• be incurred by a company subject to corporation tax
• relate to new and unused plant or machinery
• be incurred on or after 1 April 2023

HMRC’s guidance on full expensing is available here

How full expensing fits within plant and machinery allowances

Full expensing operates within the existing plant and machinery allowances system. Every asset still needs to be categorised correctly, as different categories attract different first-year treatment.

The table below summarises how assets are typically treated:

Asset category	First-year treatment
Main rate plant & machinery (new and unused)	100% full expensing
Special rate assets (new and unused)	50% first-year allowance
Other qualifying assets	Writing-down allowances
Cars / second-hand assets	No full expensing

The treatment depends on how the asset is classified. Main rate assets may qualify for full expensing, while special rate assets may instead qualify for the 50% first-year allowance.

This classification step is crucial. Two assets bought at the same time can receive very different tax treatment depending on how they are categorised.

What usually qualifies – and what doesn’t

In practice, full expensing capital allowances commonly apply to machinery, equipment and operational assets that are integral to running the business, provided they are new and unused and fall within the main rate category.

Assets that often qualify include:

• production and manufacturing equipment
• IT hardware and systems
• tools and machinery used in day-to-day operations
• commercial vehicles such as vans (but not cars)

By contrast, full expensing does not apply to:

• cars
• second-hand or previously used assets
• assets acquired for resale
• assets acquired for leasing, where exclusions generally apply

These exclusions are deliberate and are a frequent source of incorrect claims.

Special rate assets and the 50% allowance

Some assets fall into the special rate category rather than the main rate pool. These are often assets that form part of a building, such as electrical installations, lighting and heating systems.

For these assets, a 50% first-year allowance may be available instead of full expensing. The remaining balance is then added to the special rate pool and relieved gradually over future years through writing-down allowances.

This mixed treatment is common on refurbishments and fit-outs, where a single project may include assets treated in different ways for tax purposes.

Worked example: how the relief differs

Scenario

A company invests in two assets during the same accounting period:

• £40,000 on new manufacturing equipment (main rate)
• £20,000 on new electrical systems as part of a premises upgrade (special rate)

Tax treatment

• The £40,000 qualifies for 100% full expensing and is deducted immediately
• £10,000 (50%) of the electrical system qualifies for a first-year allowance
• The remaining £10,000 is relieved gradually over time through the special rate pool

Outcome

Both assets receive tax relief, but the timing of that relief differs significantly, affecting the company’s corporation tax position for the year.

Who can claim full expensing capital allowances

Full expensing is available only to companies subject to corporation tax.

Sole traders and partnerships cannot claim full expensing, although they may still be able to claim other reliefs such as the Annual Investment Allowance (AIA).

For businesses operating through more than one structure, this distinction can influence where investment is made and how it is funded.

Full expensing and the Annual Investment Allowance

The introduction of full expensing did not replace the Annual Investment Allowance.

AIA:

• allows 100% relief on qualifying expenditure (up to the annual limit)
• applies to companies, sole traders and partnerships

In some cases, a business may have a choice over which relief to apply. The most appropriate option depends on the wider tax position, future investment plans and how relief is best used over time.

Where businesses often go wrong

Issues usually arise not from aggressive planning, but from assumptions.

Common problems include:

• assuming all capital expenditure qualifies
• failing to distinguish between main rate and special rate assets
• overlooking exclusions such as cars or second-hand equipment
• poor asset records and unclear invoices

These mistakes can usually be avoided with a review before claims are made.

How Nichols & Co support businesses

Nichols & Co advise companies on capital allowances and tax-efficient investment planning, helping ensure claims for full expensing capital allowances and other reliefs are accurate, compliant and aligned with wider business objectives.

If your business is planning capital investment, understanding how full expensing capital allowances apply can help avoid errors and improve cash-flow planning.

Get in touch with a member of our team today.

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This article is for general information only and does not constitute tax advice. Tax treatment depends on individual circumstances and may change.