In the Autumn Statement last week, one of the Chancellor’s principal announcements for businesses was that full expensing – originally introduced in Spring Budget as a temporary measure – would be made permanent.
But who does this benefit and what does this mean for the UK’s 5.5 million small and medium sized businesses that provide half of the UK’s GDP and two thirds of its employment? And while the Chancellor stated that this is significant change for businesses, is it all it’s cracked up to be?
What is full expensing?
This tax incentive, with the objective of supporting businesses to invest and grow, allows companies across the UK to write off the full cost of eligible plant and machinery in the year it is acquired.
Specifically, this means for types of capital investment involving assets such as forklifts, tools and computers, as well as vans, trucks and manufacturing equipment, businesses will be able to “fully expense” these investments and set them off against taxable profits. They are, therefore, effectively rewarded with up to 25p off their tax bill for every £1 they invest.
According to the Chancellor, this amounts to a tax cut of over £10 billion per year across UK businesses, making the UK’s capital allowances regime one of the most generous in the world.
It’s good news for those that can use it
Given the current turbulent market conditions, this reform to capital allowances should give eligible businesses the confidence to invest in cutting edge equipment to boost productivity, underpin their resilience and stay ahead of the competition.
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This change will be a particularly welcome boost for British manufacturing businesses. In this sector, long term business investment has been relatively stagnant over the last 5 to 6 years, and the UK has often lagged behind rival economies. We hope to see businesses in this sector take advantage of the tax cut and increase investment.
For SMEs, exclusions apply
In our most recent SME Confidence Tracker, which surveyed 500 SMEs, 65% of respondents told us they would like to see the next government implement tax incentives to support them. So, does this announcement meet that wish?
On the face of it, this reform is great news. However, if you scratch a little deeper, it quickly becomes clear that it’s limited in scope for SMEs.
Crucially, investment in cars, leased assets and particularly second-hand assets – which are more prevalent in and relevant to the SME sector – are excluded from this benefit.
Furthermore, partnerships and sole traders do not qualify as the incentive is only available to limited companies. So, the benefits are certainly more focused toward larger, more established businesses operating in capital intensive sectors – given they can save £250 for every £1,000 invested.
Where this saving can be made, it also only partly reverses the hit to businesses from the 6% increase in the main corporation tax rate to 25%.
A welcome move, but there’s room for improvement
Making full expensing permanent should bolster the confidence of eligible businesses and incentivise them to lay down long term investment in equipment – which will in turn help them automate processes, boost productivity, employment and improve profitability.
However, it’s a great shame the scheme does not apply to leased assets – as this is one of the key funding instruments in the corporate toolbox.
The Finance and Leasing Association (FLA) is making representations to campaign for leased assets to be included. We’d also encourage the Government to widen the scheme to support investment by SMEs across a wider range of assets – including those leased along with used or second-life equipment.
SMEs are the backbone of the UK economy so, by expanding the scheme to suit their requirements, this would go much further in boosting business investment and productivity – and delivering the UK economy a much larger “bang for its buck”.