In this article, we consider the ongoing relevance of first-year allowances
The annual investment allowance (AIA) has now been set at a permanent threshold of £1 million (though as governments and Chancellors come and go, all bets are off as to how long it will really remain at that level).
For most businesses, the AIA gives immediate tax relief for expenditure on nearly all plant and machinery. The AIA is available for fixtures, including integral features, though there are a few important exclusions, most notably for cars.
Against this background, it may be thought that the age of the first-year allowance (FYA) is largely over. In reality, though, FYAs still feature prominently in the capital allowances legislation, and new ones have been added this year.
This article will first consider why a business may still want to claim FYAs, and will then explain which FYAs are available and in what circumstances. Everything written here relates to plant and machinery allowances only, so is not directly relevant for structures and buildings allowances, for example.
Why are first-year allowances still relevant?
There are various reasons why FYAs may still be claimed.
This is most likely to be the case where the £1 million limit is not adequate. In these cases, FYAs will give the fastest form of relief for any excess expenditure. There are various circumstances in which this is likely to apply.
Larger businesses
The most obvious one is simply the case of the larger business. The £1 million annual AIA limit may cover all the expenditure incurred by most businesses, but some businesses will regularly incur qualifying capital expenditure in excess of that figure.
Groups and related businesses
The £1 million AIA threshold sometimes has to be shared, for example within a group of companies.
This will apply, for example, to a parent company and (broadly) all subsidiary companies that are controlled by the parent company. The AIA must also be shared where companies are (again, broadly) under common control, even though they are not part of a group as such. Furthermore, the restriction applies where two or more qualifying activities are carried on under common control, as defined in the capital allowances rules.
In all of these cases, the £1 million annual limit on claiming AIAs can be allocated between the different parties as they choose. This obviously helps, but it still increases the chance that, in total, the threshold will be breached, such that FYAs will be the next best option.
One-off expenditure
Many businesses that do not normally spend seven-figure sums in a year on capital assets may nevertheless do so occasionally. This is most likely to arise where a business acquires a freehold property or pays a lease premium, and is in a position to claim allowances for fixtures in the property.
Example
Harry and Meg run a company that owns a number of pubs. Typically, they only claim AIAs. In June 2023, though, they construct two more pubs, taking their total qualifying expenditure to well over £1 million in the year. The AIA threshold is therefore inadequate in that year.
Short accounting periods
For various reasons, a company may change its accounting date, and this may create a short accounting period. If, for example, it has a chargeable period of just three months, the AIA limit for that period is reduced pro rata to £250,000. If the company is incurring lots of capital expenditure at the time, this may again cause it to breach the limit.
Less common structures
AIAs are only given to individuals, to companies or to partnerships consisting only of individuals. So no AIAs are available for partnerships that have a corporate member (or indeed another partnership) as one of the partners.
In any of these cases, the business may claim tax relief for any excess qualifying expenditure (over and above the AIA limit) by way of writing-down allowances. However, this means that most of the tax benefit is deferred to later years. This is not ideal, and FYAs will in some cases provide a better tax outcome.
So what first-year allowances are currently available?
FYAs are only given for items that are “unused and not second-hand”. They are therefore not available, for example, for expenditure on a used commercial property.
It is helpful to divide the FYAs that can still be claimed into two groups (and we are not including here the FYAs that are restricted to the oil industry):
FYAs relating to cars and other vehicles
FYAs are given at 100% for expenditure on the following:
- new electric cars and other new cars with zero emissions (despite the general restriction that denies FYAs for cars);
- new zero-emission goods vehicles;
- plant or machinery for a gas refuelling station “for use solely for or in connection with refuelling vehicles with natural gas, biogas or hydrogen fuel” (and it is the plant, not the station, that must be brand new); and
- new electric vehicle charging points.
Other FYAs available for limited companies only
- Companies (but not sole traders or partnerships) may claim 100% FYAs for certain qualifying expenditure on new plant and machinery at designated freeport sites and (now) investment zones. These allowances are only available for trades and certain specialist activities, however, so are not given to property businesses.
- Companies may also claim 100% FYAs (under the so-called “full expensing” rules) for qualifying expenditure on new plant or machinery that would otherwise attract writing-down allowances at 18%. If the writing-down allowances would have been at the lower (“special”) rate of 6%, then the FYAs are instead given at 50%.
The so-called super-deduction (and the related “SR allowance”) is not available for expenditure incurred since 1 April 2023.
Timing and claims
There is a general capital allowances rule that pre-trading expenditure is treated as incurred on the first day of trading (CAA 2001, s. 12). This is disapplied for the purposes of determining whether expenditure qualifies for AIAs (see s. 38A(4)) or for FYAs (see s. 50), but not for the purposes of giving these allowances generally.
HMRC’s wording in relation to FYAs (at CA 23110) is that taxpayers should “ignore this rule when you decide whether the expenditure incurred qualifies for a particular FYA”.
Example
A company incurs expenditure in February 2023 and then starts trading on 1 May 2023. In deciding whether the expenditure qualifies for particular allowances, the normal pre-trading rule is ignored. As a result, the expenditure may qualify under the super-deduction rules that applied in February but not under the full expensing rules applying in May, even though the claim is actually made for the later year.
If the company draws accounts up to 30 April each year, the claim will be made for the year to 30 April 2024. With a prompt claim, the allowances can therefore be offset against profits of the first year of trading.
Restrictions and drawbacks
All FYAs are subject to a list of “general exclusions” (given at CAA 2001, s. 46).
There can also be certain drawbacks of claiming FYAs rather than AIAs, in particular when it comes to disposing of the asset at a later stage. We will cover this point in a future article and can in the meantime answer any queries on that or on any other capital allowances matter.
