Full Expensing vs. Annual Investment Allowance - Choosing the Optimal Strategy
A New Era of Immediate Deductions
The introduction of Full Expensing (FE) in April 2023 marked a fundamental shift in capital allowances policy.
For the first time, incorporated businesses investing in qualifying main pool plant and machinery can claim a 100% immediate deduction for expenditure incurred on or after 1 April 2023, with no upper limit.
This sits alongside the long-standing Annual Investment Allowance (AIA), a 100% deduction available on the first £1 million of qualifying expenditure for most businesses, including partnerships and sole traders.
While the distinction appears straightforward, the interaction between the two regimes is nuanced, and poor planning can easily lead to inefficiency, particularly for groups or businesses with mixed expenditure profiles.
Understanding Qualifying Expenditure
Full Expensing applies only to:
New, unused plant and machinery (not second-hand or leased assets);
Assets that would otherwise qualify for main pool treatment under CAA 2001;
Expenditure incurred by UK corporation taxpayers.
AIA, by contrast, covers both new and used assets (including short-life assets and integral features) and applies to unincorporated as well as incorporated businesses.
For special rate pool assets (such as integral features and long-life assets), Full Expensing is not available; instead, a 50% First-Year Allowance (FYA) applies, with the balance written down in subsequent years at 6%.
Strategic Planning Considerations
Key points for determining the optimal mix of reliefs include:
Entity type: Full Expensing is limited to companies; partnerships and individuals remain reliant on AIA.
Expenditure profile: Where capital expenditure routinely exceeds £1m per year, Full Expensing provides additional benefit beyond the AIA cap.
Group structures: Companies within the same group share a single AIA limit but can each claim Full Expensing independently.
Leasing arrangements: Plant provided for leasing (other than under excluded finance leases) is not eligible for Full Expensing but may still qualify for writing down allowances.
The timing of expenditure is also crucial. Both regimes apply on an incurred basis, meaning contractual and payment milestones must be analysed carefully to determine the accounting period in which relief arises.
The Transitional Cliff Edge
Although FE has been legislated as a temporary measure through March 2026, there is strong political pressure to make it permanent. If withdrawn, the transitional rules could reintroduce balancing charges or restricted pools, requiring early strategic planning to avoid future clawbacks.
The Technical Bottom Line
Optimising capital allowances under the current regime requires a granular understanding of CAA 2001, including pool interactions, connected-party rules, and the treatment of mixed-use assets. For large or recurring capital programmes, a modelling exercise comparing FE and AIA outcomes across multi-year projections is the only reliable method of determining efficiency, particularly where disposals, reinvestment, and group relief interplay.