Full expensing and the annual investment allowance give tax relief for the whole cost of plant and machinery in the year of purchase, while the accounts spread the cost through depreciation. The gap between the asset’s carrying amount and its nil tax value is a timing difference, so FRS 102 requires a deferred tax liability. It reverses as the asset is depreciated or, on a sale, through the balancing charge.
Why does a 100% allowance create a deferred tax liability?
FRS 102 Section 29 uses a timing difference approach. Paragraph 29.6 requires deferred tax on all timing differences at the reporting date, defined as differences between taxable profits and total comprehensive income that arise because income and expenses are included in tax assessments in periods different from those in which they are recognised in the financial statements. Paragraph 29.8 applies this directly to fixed assets: deferred tax is recognised when the tax allowances for the cost of a fixed asset are received before or after the depreciation is recognised in profit or loss.
Full expensing is the extreme case. The company deducts the whole cost in year one, so the tax written down value is nil, while the balance sheet still carries most of the cost. The current tax charge is lower now and will be correspondingly higher later, when depreciation is charged in the accounts but no further allowances are available. The deferred tax liability recognises that future tax now, so the total tax charge stays in line with accounting profit. The general rules are covered in our page on FRS 102 Section 29.
Which allowances have this effect?
- Full expensing. HMRC describes it as a 100% first year allowance for main rate plant and machinery, available to companies within the charge to corporation tax on qualifying expenditure incurred on or after 1 April 2023. The asset must be new and unused and cannot be a car. The government’s policy paper on making it permanent notes that the qualifying amount is uncapped.
- The 50% first year allowance for special rate expenditure, such as integral features and thermal insulation. Half the cost is deducted in year one and the balance goes into the special rate pool, which attracts writing down allowances of 6% a year under HMRC’s manual CA23220.
- The annual investment allowance. GOV.UK sets the AIA amount at £1 million. It is available to unincorporated businesses as well as companies and covers both main rate and special rate assets.
- The 40% first year allowance for main rate plant or machinery bought on or after 1 January 2026, new and unused and not a car, with writing down allowances on the remaining 60%.
Ordinary writing down allowances create smaller timing differences too. HMRC’s manual CA23220 gives a main rate of 14% for corporation tax chargeable periods beginning on or after 1 April 2026, down from 18%, so the pool now runs down more slowly than many assets are depreciated. For the tax side, see our pages on full expensing and the annual investment allowance.
How is the liability measured?
Paragraph 29.12 measures deferred tax using the rates and laws enacted or substantively enacted at the reporting date that are expected to apply when the timing difference reverses. Paragraph 29.13 adds that where different rates apply to different levels of profit, the company uses the average rate expected to apply to taxable profit in the periods of reversal. A company with profits comfortably above £250,000 will normally use the 25% main rate. A company in the marginal relief band needs an average rate, which is explained in our page on which tax rate to use for deferred tax. Paragraph 29.17 prohibits discounting, however long the reversal takes.
What does it look like over the life of an asset?
Illustration only. A company with taxable profits well above £250,000 buys a new machine for £120,000 in its year to 31 March 2027 and claims full expensing. It depreciates the machine straight line over six years, charging a full year in the year of purchase. It sells the machine for £70,000 early in the year to 31 March 2030.
| Year end | Carrying amount | Tax written down value | Timing difference | Deferred tax liability at 25% |
|---|---|---|---|---|
| 31 March 2027 | £100,000 | Nil | £100,000 | £25,000 |
| 31 March 2028 | £80,000 | Nil | £80,000 | £20,000 |
| 31 March 2029 | £60,000 | Nil | £60,000 | £15,000 |
| 31 March 2030 (after sale) | Nil | Nil | Nil | Nil |
In year one, taxable profit is £100,000 lower than accounting profit, saving £25,000 of current tax, and the deferred tax charge of £25,000 restores the total. In each of the next two years the £20,000 of depreciation is added back with no allowance to replace it, so current tax rises by £5,000 and £5,000 of the liability is released.
On the sale, the accounts show a profit on disposal of £10,000 (£70,000 less the £60,000 carrying amount). For tax, HMRC’s manual CA23174AD says that where full expensing was claimed on the whole cost, the balancing charge equals the whole disposal value, so £70,000 is taxed, costing £17,500. The remaining £15,000 liability is released. The net charge of £2,500 is 25% of the £10,000 accounting profit, which is exactly what the deferred tax mechanism is meant to achieve.
When does the liability reverse?
There are three routes:
- Depreciation. Each year’s depreciation is disallowed for tax with nothing to replace it, so taxable profit exceeds accounting profit and the liability unwinds.
- Disposal. A balancing charge brings the proceeds into tax. For full expensing, GOV.UK guidance says the charge is the disposal value multiplied by the relevant proportion (the amount claimed under full expensing divided by the original cost). For the 50% allowance, CA23174AE makes the charge half the disposal value where the allowance was claimed on the full cost. Proceeds from an asset that had the AIA go to the pool instead, and HMRC’s manual CA23086 explains that this can produce a balancing charge where the pool is empty.
- Impairment or scrapping. A write down in the accounts reduces the carrying amount, and so the timing difference, even if the tax effect only comes later on disposal.
Paragraph 29.27(c) requires companies applying the full disclosure requirements to state the net reversal expected in the following year with a brief explanation. Planned asset sales should be factored in, not just the depreciation profile. The tax treatment of sales is covered in more depth in selling assets after full expensing.
What about pools and special rate assets?
For assets in the main or special rate pool, the timing difference is the total carrying amount of the pooled assets less the tax written down value of the pool. Fully expensed assets sit outside the pool calculation because their tax value is nil, so it helps to keep a fixed asset register flag showing which allowance each asset received. A special rate asset that had the 50% allowance has a tax value equal to half its cost less writing down allowances on that half, so its timing difference builds more slowly but lasts longer.
How do full expensing and losses interact?
Because full expensing is uncapped, a large investment can turn a profit into a tax loss. The company then has a deferred tax liability on the asset and potentially a deferred tax asset for the loss. Paragraph 29.7 allows the loss asset to the extent it is probable it will be recovered against the reversal of deferred tax liabilities or other future taxable profits, so the liability on the machine is itself evidence that supports recognising the loss. Paragraph 29.24A sets out when the two may be offset on the balance sheet. See recognising a deferred tax asset for losses.
What mistakes come up most often?
- Leaving deferred tax out because no tax is payable this year. A small company using Section 1A still applies the Section 29 recognition rules in full, and paragraph 1AC.11A now requires it to analyse its balances by type of timing difference under paragraph 29.27(e).
- Using 25% automatically when profits in the reversal years are expected to sit in the marginal relief band.
- Forgetting the balancing charge when an asset is sold, or deducting the proceeds from the pool as well as taxing them as a balancing charge. GOV.UK says the disposal value included in the balancing charge must not also be deducted from the pool.
- Treating the difference as permanent. It is a timing difference that will reverse, not a tax saving to be shown in the reconciliation.
- Not updating for the new 14% main pool rate on assets that are still being written down.
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Related Accountapedia entries
- Deferred tax on revaluations and investment property
- Keeping a fixed asset register
- Why micro entities do not show deferred tax
- Deferred tax: IAS 12 vs FRS 102
- Deferred tax on leases after the 2026 changes
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- GOV.UK: Check if you can claim full expensing or 50 first year allowances
- GOV.UK: Capital allowances permanent full expensing for companies investing in
- GOV.UK: Manual page CA23220
- GOV.UK: Annual investment allowance
- GOV.UK: 40 first year allowance
- GOV.UK: www.gov.uk
- GOV.UK: Disposing an asset if you claimed full expensing or 50 first year allo
- GOV.UK: www.gov.uk
- GOV.UK: Manual page CA23086
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.