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There weren’t many surprises in Jeremy Hunt’s Spring Budget 2024 – most of the big-ticket items were trailed in the media, with the chancellor hoping to avoid being a hostage to fortune and to embed his key messages as we head into election season.

One surprise in the mix, however, was the announcement that full expensing and special rate first year capital allowances for expenditure on new plant or machinery acquired for leasing would be introduced ‘when fiscal conditions allow.’

The current carve-out for leased assets

Coming on the back of last year’s Autumn Statement, in which full expensing for main pool assets and 50% first-year allowances for special rate assets were made permanent, the intended extension to leased assets is welcome news.

The proposed change would remove a long-standing restriction, whereby assets bought to be leased to others generally do not qualify for first-year allowances. The leasing industry, in particular, argues that the changes are overdue because, as they rightly point out, there have been significant developments in the industry, in particular over the past 20 years or so, and the factors that originally justified the restriction no longer apply.

The restriction on first year allowances for assets that are leased out was borne out of a perceived threat from aggressive tax planning using leasing arrangements to create accelerated, artificial, or double allowances. A notable example of this was the arrangement considered by the House of Lords in the case of Barclays Mercantile Business Finance Limited v Mawson, in which HMRC was ultimately unsuccessful in denying capital allowances. However, the introduction of various anti-avoidance measures (including, in particular, the disclosure of tax avoidance schemes rules and the general anti-abuse rule) mean that the tax planning landscape has radically changed. The types of arrangements the restriction was introduced to counteract would be unlikely to succeed in its absence and may anyway be unacceptable from a commercial governance perspective.

Why the proposals make sense

The proposed extension to full expensing and special rate first-year allowances makes good sense, both from a micro- and macro-economic point of view. It will allow leasing companies to operate on a level playing field with owner-operators of the same assets, as the post-tax cost of acquiring assets is currently significantly more for plant-leasing businesses than for businesses buying the same assets to operate themselves. This imbalance could well be acting as a barrier to investment and, consequently, growth. Additionally, the proposals would remove a pitfall that can arise where assets are owned and used by different entities within the same corporate group. Such arrangements are commonplace and not normally tax motivated; nonetheless, the leasing restriction can act to deny first year allowances.

How the announcement fell short

So, the proposals appear to herald good news, at least at first glance. However, the chancellor was clear that he will only remove the leasing restriction ‘when fiscal conditions allow.’ Furthermore, the details of this plan are yet to be announced. Although draft legislation will soon be published for technical consultation, by the time it is ready to be introduced to parliament, we may well have a new government with a new chancellor. And who is to say that a new government will be predisposed to extend full expensing to leasing, in line with the current proposal?

Businesses need a measure of certainty, and the ability to plan for the long term. Whilst the intention to extend full expensing and special rate first year allowances to assets for leasing is welcome, it would have been much more welcome had the chancellor announced a timeframe for when businesses might expect to benefit from this change. In the meantime, those affected by the proposals should continue to consider, together with their advisers, the post-tax returns on leasing transactions under the current capital allowances regime.

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