In the Spring Budget of 2024, the Chancellor of the Exchequer announced plans to extend full expensing – aka. 100% tax relief – to leased assets in the year of their purchase.

The extension of full expensing to leased assets, explained

Hailed as a positive move to promote growth in SMEs, 100% tax relief will be available for leasing commercial assets such as equipment and machinery.  

What will this legislation change?

At the moment, if a business owner buys a machine for £100,000, that cost is entirely tax deductible. However, if the business owner leases it for the same amount, they may be able to claim some capital allowance as tax relief but it will not give anywhere near the same level of tax reduction, especially in the first year of leasing. 

Under this new legislation, businesses will be entitled to expense 100% of the leased asset. That will allow the business owner to reduce their taxable income in the year of the investment, reducing their tax liability and therefore improving cash flow. 

Why is this being introduced?

Historically, full expensing has only been available for machinery a company has bought outright. The change is intended to incentivise business investment for owners of businesses that need expensive capital assets such as heavy machinery in order to operate. 

The FLA & BVRLA have highlighted this as a huge missed opportunity, prompting the government to address this historical injustice.

What kind of assets will qualify for full expensing?

There are no confirmed details yet as to what kind of leased equipment will qualify for full expensing. However, the existing rules for the expensing of purchased equipment apply to:

  • Plant equipment and machinery 
  • Tools
  • Vehicles
  • Computers

These are all mainstream ‘loose’ assets that would otherwise go into the capital allowance pool. Provided all of the above are used for business purposes, they would currently meet the criteria to be fully expensable if they were purchased outright. 

Therefore, it’s reasonable to assume that the ability to expense leased assets will apply to this kind of asset class. 

Things that may still be excluded from the tax relief include ‘integral’ building assets, which fall into the special rate pool. These are items that functionally make up part of the structure of the building, for example, assets such as electrical systems, lifts or escalators. 

What kind of leasing will qualify?

As before, we do not have confirmed details about this yet.

When drafting the new rules, the government is likely to use similar criteria to those that currently determine if a leased asset qualifies for capital allowances based on who is treated as the effective owner for tax purposes. 

This existing approach is likely to carry over when deciding which leased assets will be eligible for the new full expensing tax relief. This would mean that leases which are treated as equivalent to ownership, like long-funding leases and hire-purchases would likely qualify. 

However, shorter operating hire agreements may need to be structured specifically as a lease of equipment or machinery rather than just as a service contract. These specific types of leases will likely bring a level of complexity into determining eligibility for full expensing. 

What is the potential impact of this change?

The benefits are aimed at business owners who prefer leasing or cannot afford the upfront costs of new machinery. This effectively ‘levels the playing field’ by affording leased plant equipment and machinery the same full level of tax relief as when it’s purchased outright. 

This is also predicted to have a beneficial effect on the leasing industry. 

When will this new change be implemented?

Legislation to allow this change is currently being drafted. The government reports that it will be introduced ‘when fiscal conditions allow’, however, this does not give any defined timeline. 

It is possible that the government are currently assessing the affordability of the scheme relative to the impact it could have. 

Want to discuss how to create an expensing strategy that makes the most of allowances? Contact our team of expert tax accountants at Williamson & Croft today.