In recent years, full expensing has emerged as a powerful incentive for businesses to maximise their investments and minimise their corporation tax liabilities. As the super-deduction policy expires in 2023, full expensing is set to become a vital tool for stimulating capital investment and economic growth in the UK.
This article will explore the intricacies of full expensing and its potential impact on investment, as well as how it relates to other tax incentives such as the super-deduction and research and development (R&D) tax credits. We will also discuss policy recommendations surrounding this concept and its possible expiration.
Full Expensing: An Incentive for Business Investment
Full expensing allows firms to immediately deduct the entire cost of their capital investments from their corporate tax liabilities, contrasting with the traditional depreciation system. In this system, businesses can only deduct a small portion of their annual investment costs over the investment’s accounting life.
This difference is crucial, as the depreciation system often results in companies not recovering the entire cost of their investments due to inflation and alternative investment opportunities. By allowing businesses to deduct the full cost of their investments, full expensing effectively incentivises greater capital investment, which in turn can spur economic growth.
Full Expensing, Corporation Tax, and the Super-Deduction
Full expensing can save companies a significant amount of corporation tax by allowing them to offset their tax liabilities with their capital investment expenditures. This can be particularly beneficial for firms investing in new buildings or machinery, as they can recover the entire cost of these investments.
This concept is similar to the super-deduction, a temporary tax incentive introduced in the UK in 2021, which allowed businesses to deduct 130% of their qualifying capital investment costs from their taxable profits. Both full expensing and the super-deduction aim to encourage capital investment and stimulate economic growth.
Full Expensing and Research and Development Tax Credits
In addition to full expensing, another tax incentive that can benefit businesses is the R&D tax credit. This credit allows companies to claim tax relief on their R&D expenditures, further promoting innovation and growth.
Full expensing and R&D tax credits can work together to create a comprehensive tax system that supports business investment in various forms, from capital investments in machinery and buildings to investments in innovation and technological advancements.
Policy Recommendations and the Future of Full Expensing
Given the positive evidence supporting full expensing, it is welcome news for UK corporation tax payers that the Chancellor has introduced it in the UK. Although the measure is initially for three years, the government intends to make this valuable tax relief permanent, ensuring a competitive and attractive business environment for both domestic and international investors.
To maximise the benefits of this, the UK should consider aligning this policy with long-term economic and environmental goals, supporting industries that drive sustainable growth. Additionally, more data and examples from other countries that have implemented full expensing can help shape future policy recommendations.
Full expensing has emerged as a powerful tool for businesses, allowing them to maximise their investments and minimise corporation tax liabilities. As the super-deduction policy expires in 2023, the new full-expensing policy will maintain momentum in capital investment and continue fostering a competitive business environment. Coupled with other tax incentives, such as R&D tax credits, the UK can create a comprehensive tax system that supports business growth and innovation for many years.
Don’t miss out on the benefits of full expensing for your business! As tax experts specialising in capital investment, Jack Ross Chartered Accountants are here to help you navigate the complexities of full expensing, corporation tax, and other tax incentives that can transform your business’ growth and innovation.
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