HM Revenue & Customs (HMRC) has released enhanced guidance on the administration of the 40% first year allowance (FYA) for capital assets purchased by UK businesses.
The new HMRC manual provides fresh clarity on documentation, overseas leasing considerations, change of asset use, and the evidence required to claim this accelerated tax relief.
The update aims to assist companies in understanding how to meet qualifying conditions, particularly amidst complex leasing and cross-border asset usage scenarios.
Firms making significant investments in plant and machinery are advised to review these developments, which have implications for tax planning and compliance.
Introduction to the 40% First Year Allowance
The 40% FYA allows businesses to claim substantial tax relief in the year qualifying capital expenditure is incurred.
To be eligible, the lessee or sub-lessee must be subject to UK tax at the time of investment and claim. HMRC underscores the need for robust processes and record-keeping to demonstrate that all requirements are fulfilled, especially if HMRC requests evidence.
Treatment of Asset Use After Initial Period
HMRC confirms that there are no retrospective review obligations. Once an FYA is validly claimed with all conditions satisfied, later changes to the use of the asset or the identity of the lessee or sub-lessee do not prompt an automatic adjustment or claw-back.
Previous rules under section 111 of the Capital Allowances Act 2001, which addressed changes of use for overseas leases, no longer apply to the 40% FYA.
Timing and Anti-Avoidance Measures
Historically, some businesses manipulated accounting periods to optimise capital allowance timing. Section 220 of the Capital Allowances Act introduced in 1997 required time apportionment of writing down allowances (WDA) in certain cases,
while long funding lease rules prevented timing mismatches on extended agreements. HMRC now states that these rules do not impact the FYA, provided the anti-avoidance provisions are not breached.
Defining ‘Insignificant’ Overseas Leasing
HMRC’s guidance discusses how to identify what constitutes ‘insignificant’ overseas leasing for FYA eligibility. A 5% threshold is typically accepted by
HMRC as a marker, with anything below this level considered not significant for the purposes of the rules. For instance, if an asset is leased to a UK business for 50 weeks of the year but used overseas for only 2 weeks, the overseas element is under 5% and would be deemed insignificant.
Asset Location and Eligibility
The new manual reiterates that the physical location of an asset outside the UK does not, of itself, disqualify the transaction from the FYA. The crucial factor remains the UK tax status of the lessee or user.
For example, if a UK airline leases aircraft operating internationally but is taxed in the UK, FYA still applies. Similarly, if a UK tax resident leases a van for personal travel abroad without earning foreign taxable income, the relief is still available.
Final Summary
The latest HMRC guidance on the 40% first year allowance provides badly needed clarification for businesses considering or engaging in the leasing of plant and machinery. The measures focus on robust record-keeping, clear eligibility rules for overseas activities, and guidance on what constitutes ‘significant’ non-UK use.
Companies are urged to ensure full compliance at the point of claim and to maintain thorough documentation, particularly where assets may be subject to future sub-leasing or cross-border arrangements. The updated position is intended to reduce ambiguity, support investment, and steer clear of anti-avoidance pitfalls.
Businesses seeking clarity on technical details may find digital tax resources such as Pie app a useful reference for staying abreast of capital allowance updates.
