First-Year Allowance

What is the First-Year Allowance

The first-year allowance is a UK tax allowance permitting British corporations to deduct between 6% and 100% of the cost of qualifying capital expenditures made during the year the equipment was first purchased. This serves as an incentive for British companies to invest in emerging and eco-friendly products.

Breaking Down First-Year Allowance

The first-year allowance is an important tax incentive encouraging UK businesses to make investments in capital equipment. Its origins date back to the post-World War II era when the British government was looking for ways to rebuild the economy. The British government permits first-year allowances for various capital investments including computer and internet technology, as well as energy-saving technologies. The allowable amount of this tax credit ranges from 6 percent to 100 percent.

Examples of capital expenditures eligible for the first-year allowance include some cars that meet low CO2 emission standards, various biofuel equipment, and hydrogen refueling equipment as well as zero-emission delivery vehicles. The first-year allowance only applies in cases where the business that purchased the capital goods uses them for their own business and not when leased for use by others.

If a business does not take the first-year allowance in the eligible tax year, they can still claim a partial reduction on the cost in the following year using alternative write down allowances. Full information on what is eligible for the first-year allowance and how to file can be found on the Gov.UK website.

The Origins of the First-Year Allowance

Following World War II, British lawmakers looking to revitalize the economy passed the Income Tax Act of 1945, which launched a system of capital allowances to encourage business investment.

Beginning in 1946 the former wear-and-tear allowances for machinery were replaced with a new system of first-year allowances, which given their timeliness, worked better in bringing about the desired quick economic impact. In tandem with these new allowances, increases to the write-down provisions of the tax code were made to further aid business development. A key component of this effort to stimulate the post-war economy was a first-year allowance for replacing the vacant old mills and buildings from the Industrial Era with modern buildings better suited for the post-war manufacturing and information services economy.

Nowadays, the first-year allowance is an important incentive for businesses to invest in green, or clean, technologies. To further encourage this, the British government in late 2017 extended the first-year allowances on zero-emission vehicles and refueling equipment to a full three years, instead of just the first year.

Article Sources
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  1. PWC. "United Kingdom-Corporate-Deductions."

  2. Gov.uk. "HMRC Internal Manual-Capital Allowances Manual."

  3. Gov.uk. "Claim Capital Allowances."

  4. A. Farnsworth. "The Modern Law Review, Vol 8, No. 4.-The Income Tax Act, 1945, and The Finance Act, 1945," Pages 243 to 247. Wiley, 1945.

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