Full expensing and R&D

by | Nov 22, 2023 | Tax

Full expensing

In the Spring Budget earlier this year, the Chancellor announced three years of “full expensing”; a temporary increase in the tax relief available on qualifying capital expenditure for UK companies.  This was initially designed to incentivise investment after the super-deduction came to an end on 31 March 2023. This originally applied to qualifying expenditure incurred on or after 1 April 2023 but before 1 April 2026. The Autumn Statement has now made full expensing permanent, and, therefore, 100% tax relief on qualifying expenditure is available from now on.

Where a company incurs expenditure on assets that would otherwise qualify for the main pool such as furnishings and computer equipment, it is now able to claim 100% first-year allowances against their taxable profits in the year the expenditure is incurred. This means that, whereas previously, businesses have claimed writing down allowances over a potentially lengthy period of time at 18% reducing balance, a tax-deduction can now be claimed for up to 100% of the cost of the asset in the period the expenditure is incurred. Companies can, therefore, receive the benefit of a full 25% in-year corporation tax saving.

There is also a first-year allowance for capital expenditure incurred on special pool assets at a rate of 50%. These include thermal insulation, long-life assets, and lighting systems. Importantly, the annual investment allowance of £1 million will still be available for qualifying assets. Whereas expenditure of £2 million on a special rate asset would have had annual investment allowance of £1 million and minimal writing down allowances, under full expensing, the deduction would be £1.5 million being the £1 million annual investment allowance, and 50% of the remaining expenditure.

Research and development

It was also announced that the government intends to go ahead with the plan to merge the small-medium enterprise (SME) and large company research and development (R&D) schemes, stating that this is an effort to simplify the claims process and ensure innovation is supported efficiently. Following a consultation earlier this year, the merged scheme has been announced to take effect from accounting periods commencing on or after 1 April 2024.

This scheme is planned to operate similarly to the large company scheme (RDEC) where companies will receive an expenditure credit that can be set against their tax liability or be paid in cash if loss-making. However, it is suggested this will differ slightly from RDEC in that the merged scheme may apply the more generous PAYE and National Insurance repayment caps currently in place under the SME scheme.

The current RDEC net benefit is 15% (assuming a corporation tax rate of 25%). The notional tax rate applied to loss-makers in the merged scheme will be lowered from 25% to 19%. Currently, for SMEs there is an 86% uplift on costs available, and a 18.6% credit. Under the new merged scheme, for ‘R&D intensive’ companies (companies where qualifying expenditure constitutes at least 30% of total expenditure), relief will be more beneficial than under the SME scheme.

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