Tax relief on leasing plant and machinery in first year of investment now available but HMRC still consulting on draft guidance
But the sting in the tail at the Budget was decision to cut main rate of writing down allowance (WDA) from April, the new 40% permanent first-year allowance (FYA) for main-rate plant and machinery expenditure came into effect on 1 January, following announcement by the chancellor at the last Budget.
This will be available for assets bought for leasing and for unincorporated businesses, which do not benefit from full expensing, while preserving the current incentives to invest. The FYA will be beneficial primarily where the £1m annual investment allowance (AIA) or existing FYAs (such as full expensing) are unavailable or not preferred.
This will enable the leasing sector, which is currently excluded, to benefit from some accelerated relief.
It is important to note the relief will be available to all businesses, not just incorporated businesses. However, cars and second-hand assets are not eligible for the relief, and there is a specific exclusion for overseas leasing.
However, HMRC has not released detailed guidance as yet, leaving some uncertainty about the interpretation of the terms ‘wholly, or almost wholly’.
An HMRC spokesperson said: ‘We’re consulting with stakeholders on draft guidance which we will publish as soon as possible.’
Until guidance is published and legislation receives royal assent, businesses will have to refer to other available HMRC resources online, the tax authority stressed.
Leasing will be permitted provided that the lessee uses the asset “wholly, or almost wholly” for earning income chargeable to UK tax. This would cover leases to UK
businesses (incorporated or not) and taxable UK establishments of overseas businesses.
‘The changes are likely to have a substantial impact for large lessors of plant and machinery, who up until now have been largely excluded from the opportunity to claim FYAs.
‘It should also have the effect of reducing funding costs for lessees, where the benefit of increased capital allowances can be factored into the lease costs, sharing the benefit of the new FYA between lessor and lessee.’
While the government has introduced the new 40% FYA, this is being offset from April 2026 with a reduction in the main rate of writing down allowance from 18% to 14%, the first cut since 2012. This is expected to raise around £1.03bn in additional revenue in 2026-27, rising to £1.50bn in 2027-28.
However, there is a sting in the tail as from April 2026 businesses will only be able to claim relief on the remaining balance at just 14%, the Treasury said this was ‘to ensure this new relief is introduced in a fiscally sound way’.
‘Businesses still claiming WDAs for expenditure incurred in earlier years or who claim WDAs for any expenditure not covered by the AIA, super-deduction or full expensing may be adversely affected by the decrease in the WDA rate,’ the HMRC policy paper warned.
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