First-year allowance (FYA) refers to a tax incentive that allows businesses to deduct the full cost of qualifying capital expenditures from their taxable income in the year the assets are first used.
What is first-year allowance?
It is a method used by governments to encourage businesses to invest in specific types of assets by providing a more immediate tax benefit.
First-year allowance typically applies to specific categories of capital expenditures, such as qualifying plant and machinery. These assets are essential for business operations and can include items like machinery, equipment, and certain types of vehicles.
Instead of spreading the deduction over several years through depreciation, businesses can deduct the entire cost of qualifying assets in the year of purchase. This provides an immediate tax benefit and improves cash flow.
To qualify for first-year allowance, assets must meet specific criteria outlined by tax authorities. The criteria may include the type of asset, its intended use, and the industry in which the business operates. Not all capital expenditures may be eligible for first-year allowance. Qualifying assets for first-year allowance may include energy-efficient equipment, certain types of machinery, environmentally beneficial technologies, and other assets that fit government priorities.
Businesses can strategically plan their capital expenditures to maximise the benefits of first-year allowances. Timing the purchase of qualifying assets can have significant implications for a company’s overall tax liability.
Example of first-year allowance
Company ABC decided to invest in new machinery to enhance its production capabilities. They purchased machinery worth £200,000 that qualifies for a first-year allowance of 50%, as specified by the government’s tax incentive program aimed at promoting technology adoption in manufacturing.
Without first-year allowance, the company would typically depreciate the machinery’s cost over several years for tax purposes. However, with the first-year allowance:
- Machinery cost: £200,000
- First-year allowance (50%): £100,000
In this example, Company ABC is eligible for a first-year allowance of £100,000, allowing them to deduct this amount from their taxable income in the year the machinery was purchased.