We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
HMRC publishes draft guidance on First Year Allowance
Following announcement of some key capital investment tax changes in the Autumn Budget 2025, draft guidance for the new 40% First-Year Allowance (FYA) has been published by HMRC.
As stated in the guidance, the legislation introducing the 40% first-year allowance is still subject to Parliamentary approval and Royal assent. It has been published ahead of Royal assent because the first-year allowance will be available for expenditure incurred on or after 1 January 2026 so as to provide as much clarity as possible.
From 1 January 2026, the new 40% FYA will be available for qualifying expenditure on plant and machinery. The measure is intended to accelerate tax relief on capital investment by allowing businesses to deduct 40% of qualifying expenditure in the year the cost is incurred, with the balance relieved through the capital allowances regime in subsequent periods.
To fall within the scope of the relief, the expenditure must be incurred on or after 1 January 2026 and must relate to the provision of plant or machinery that is not classified as special rate expenditure. The assets must be new and unused; second-hand assets are specifically excluded. In addition, the expenditure must not fall within the general exclusions contained in Section 46(2) of the Capital Allowances Act 2001, such as expenditure on the provision of cars. The relief is also denied where the expenditure is incurred under disqualifying arrangements, reflecting the targeted anti-avoidance framework that accompanies the regime.
The allowance is available to entities within the charge to either Corporation Tax or Income Tax, thereby extending its application beyond companies to unincorporated businesses. Mixed partnerships are also able to access the relief in respect of both corporate and individual members, ensuring that partnership structures are not disadvantaged.
A notable feature of the 40% FYA is the modified treatment of leased assets. Broadly, expenditure on leased plant or machinery will qualify where the assets are used to generate income within the charge to UK tax. This includes situations where the lessee, and any sub-lessees, use the assets wholly or almost wholly for activities producing taxable income in the UK. Relief may also be available where the lessee is UK-resident, provided the assets are not used to a significant extent to earn income from non-UK sources that fall outside the UK tax charge.
In practical terms, this means that leasing plant or machinery to UK businesses for use in UK trading activities will generally qualify. Similarly, leasing to UK-resident persons can fall within scope provided overseas untaxed use is not substantial. Where sub-leasing arrangements exist, the qualifying conditions must be satisfied throughout the leasing chain. By contrast, expenditure on assets leased to non-UK residents for the purpose of generating income outside the UK tax will not qualify.
For these purposes, leasing is interpreted widely. The concept extends beyond traditional lease agreements to include asset hire and the chartering of ships, ensuring functional equivalence across commercial arrangements. Income is treated as outside the charge to UK tax where relief is available under double taxation agreements or unilateral relief provisions. Lessors must assume that lessees claim all available reliefs unless evidence demonstrates otherwise. This assumption can affect eligibility, for example where assets are used by foreign permanent establishments whose profits may be exempt from UK tax.
The regime is supported by both existing and bespoke anti-avoidance provisions. Expenditure will not qualify where it arises directly or indirectly from arrangements designed to secure a tax advantage through access to the FYA. Arrangements may be considered disqualifying where they are contrived, abnormal, lack genuine commercial purpose, or are intended to circumvent the policy intent of the legislation. HMRC does not provide advance clearance on the application of these rules, meaning eligibility must be assessed based on the full facts.
Where a 40% FYA claim is made, only part of the expenditure is relieved upfront. The remaining unrelieved balance cannot be allocated to a capital allowances pool in the same chargeable period but may be pooled in a later period, provided the asset has not been disposed of in the interim. Short-life asset elections may still be made in conjunction with the relief, although additional statutory considerations apply, particularly where leasing activity is involved or where asset use subsequently changes.
A later change in the use of the asset does not automatically trigger a clawback of the allowance. For instance, plant or machinery initially leased for qualifying UK use may later be leased overseas without requiring the original FYA to be reversed, nor is a deemed disposal created. Nevertheless, such changes must still be reviewed through an anti-avoidance lens where pre-arranged structuring is suspected.
On disposal, the assets follow the normal capital allowances disposal rules. Unlike some enhanced relief regimes, the claiming of the 40% FYA does not in itself create an immediate balancing charge mechanism. Timing anti-avoidance rules that reallocate leasing expenditure across chargeable periods similarly have limited practical effect on the relief, as the FYA is claimed before any pooling adjustments arise.
Finally, the allowance interacts with existing ownership deeming provisions. In long funding lease arrangements or hire-purchase contracts, the party treated as the capital allowances owner, rather than the legal owner, is entitled to claim the relief, provided all other qualifying conditions are met.
In summary, the 40% First-Year Allowance represents a significant acceleration of tax relief for investment in new plant and machinery from January 2026. Its broadened availability to leased assets enhances its commercial relevance, though eligibility remains contingent on UK taxable use and robust anti-avoidance safeguards. Careful analysis of asset use, leasing structures, and tax exposure will be essential to securing and sustaining the relief.
Further resources
Visit ACCA’s Budget hub for the latest tax rates and tables
Read ACCA’s article on other upcoming tax changes
Download ACCA’s technical factsheet on leasing following FRS 102 amendments