What are first year allowances?
First year allowances are a tax incentive in the UK that allows corporations to deduct the cost of qualifying expenses against their tax bill in the first year the equipment was purchased.
Learn more about year end accounting for limited companies and what documentation you need to gather for your tax return.
First year allowances are a type of capital allowance that allows UK companies to invest in new technology and offset the cost against their taxable profits. This is especially useful to new businesses that incur large expenses throughout their first year of trading.
If the business does not claim the first year allowance within the year of purchase, there are other ways that the business can claim partial reductions in following years.
What qualifies for first year allowances?
Most eco-friendly and emerging technologies can be claimed as first year allowances. For these types of capital allowances, you can claim up to 100% of the costs. Some purchases that qualify include:
- Low-emission cars & vehicles
- Water saving equipment (e.g. water meters and water efficient toilets)
- Energy saving equipment (e.g. energy-efficient motors)
- Gas station equipment (e.g. storage tanks and pumps)
It is important to note that the make and model of your purchase needs to be on the government approved list in order to qualify for first year allowances.
Your purchase must be exclusively for business use and you cannot claim on items you intend to rent or sell.
How to claim first year allowances
You can claim your capital allowances on your tax return. If you are a sole trader, this would be your Self Assessment, and if you are a company, you would claim on your Company Tax Return.
If you wish to claim the full value, you need to make the claim in the accounting period in which you bought the item. You will need to keep proof of the date that you purchased the asset. This may include a contract, invoice, or receipt.
Keep track of your expenses now
First year allowance for cars
First year allowances are most commonly used for car purchases. If a business purchases a low-emission vehicle they can offset the full price of the purchase. The car must be on the government approved list and must be a new car, you cannot claim with used vehicles.
First year allowance example
A type of first year allowance called the “Super-deduction” was introduced in the UK to encourage businesses to purchase new equipment and jumpstart the economy post-pandemic. The super-deduction allows businesses to claim 130% of qualifying expenditure against their tax bill.
Let’s say that a business purchased 10 computers in June 2021 for £10,000. In their 2021/2022 Company Tax Return, the business can claim 130% (£13,000) against their taxable profits.
Invoicing software and first year allowances
Invoicing software not only helps you to create invoices, but it can also help you easily keep track of your expenses, and organise your accounts for your tax return.
With Debitoor, you can snap a photo of your receipt from the mobile app and it will automatically upload to your account as an expense. Never lose a receipt and always have an accurate overview of your finances.
Your recorded income and expenses will be used to automatically generate your accounting reports such as the balance sheet and profit and loss statement. These will help you complete your tax return.
