At a glance
- The accelerated allowance relieves qualifying expenditure over two years instead of the ordinary schedule, but it does not increase the total relief — it only moves it forward.
- Paragraph 71 of Schedule 3 withdraws capital allowances where an asset is owned for less than two years, through a balancing charge measured by the allowances given rather than by the disposal price.
- The machinery categories require direct acquisition from local manufacturers, and for ICT equipment the acceleration changes only the second year, not the first.
Budget 2026 introduced an accelerated capital allowance on qualifying capital expenditure incurred between 11 October 2025 and 31 December 2026, relieved in full over two years rather than over the longer ordinary schedule. Most summaries of the measure stop at the rate. The condition that more often decides whether accelerating a purchase was worthwhile sits elsewhere in the Act: paragraph 71 of Schedule 3, which withdraws capital allowances where the asset is owned for less than two years. On an asset whose entire cost has been relieved inside two years, the amount exposed to that withdrawal is the whole of it.
This article sets out what the accelerated allowance changes, the qualifying conditions a rate summary tends to leave out, and how the two-year withdrawal operates. It deliberately does not reproduce the rate schedule or the qualifying categories in force at the time you read it. Those are set by rules made under the Income Tax Act 1967 and by a time-limited window that closes at the end of 2026, and they should be taken from the Inland Revenue Board’s own current material rather than from a website.
Initial allowance and annual allowance are two different things
A recurring source of confusion is worth clearing first, because published commentary on this measure contradicts itself. One source gives 20% for general machinery; another gives 14%. Both figures are right, and they describe different allowances. Under Schedule 3 of the Income Tax Act 1967, qualifying plant expenditure attracts an initial allowance, given once in the year the expenditure is incurred and the asset is in use for the purposes of the business, and an annual allowance, given for each year the asset remains in use at the end of the basis period.
The Ministry of Finance’s own tax measures annex to Budget 2026 states the ordinary position the accelerated allowance was legislated against: 20% initial and 20% annual for motor vehicles and heavy machinery; 20% initial and 14% annual for plant and general machinery; 20% initial and 10% annual for other assets; and 40% initial and 20% annual for ICT equipment and computer software. So a company buying general machinery relieves 34% of the cost in the first year and 14% in each year afterwards, reaching full relief in roughly six to seven years. That is the schedule the measure compresses.
What the acceleration is worth depends on what is being bought
The accelerated allowance is a 20% initial allowance and a 40% annual allowance. Sixty per cent of qualifying expenditure is therefore relieved in the first year and the remaining 40% in the second. For plant and general machinery that is a substantial change: a schedule running six to seven years is compressed into two.
For ICT equipment and computer software it is not. Those assets already attract 40% initial and 20% annual under the ordinary rates, which is also 60% in the first year. The accelerated allowance leaves the first year exactly where it was and moves the residual 40% out of years two and three into year two alone. The benefit is real, but it is one year of timing on 40% of the cost rather than any improvement to the first-year position — a distinction worth making before a technology purchase is brought forward on the strength of the headline.
The total relief does not change; only its timing
Whatever the category, the accelerated allowance does not increase the relief available. Qualifying expenditure is relieved in full either way. What changes is when, and that has a genuine cash-flow value for a company with sufficient adjusted income to absorb the allowance in the year it arises.
For a company with no chargeable income to set it against, the effect is different: the allowance increases unabsorbed capital allowances carried forward, whose availability in later years is subject to separate carry-forward conditions. A loss-making company accelerating relief it cannot use this year has moved a deduction into a year where it does nothing, and made it dependent on conditions it must then keep satisfying. Acceleration is worth least to the company that most readily assumes it must be worth something.
Two conditions the rate summaries leave out
The Budget annex attaches the accelerated allowance to four categories of expenditure, and two of them carry a sourcing condition. Heavy machinery, and plant and general machinery, qualify where acquired directly from local manufacturers. Imported machinery, and machinery bought through an intermediary rather than from the manufacturer, do not answer that description on their face. The other two categories — the purchase of ICT equipment and computer software packages, and consultation, licensing and incidental fees relating to the development of customised computer software — carry no equivalent sourcing condition. The annex also expresses the measure as one claimed by companies.
A Budget annex states the Government’s proposal. The measure takes legal effect through rules made under the Act, and the qualifying categories, conditions and any restrictions in the instrument as made are what govern a claim. Confirm them against the Inland Revenue Board’s current material before treating a particular item of expenditure as qualifying, and do not rely on a Budget summary — including this one — as the authority for a filing position.
Paragraph 71: the allowances come back
Where a person has incurred qualifying expenditure on an asset owned for less than two years, paragraph 71 of Schedule 3 provides that the allowance which would otherwise fall to be made shall not be made; and where an allowance has already been made, a balancing charge equal to that allowance is made for the year of assessment in the basis period in which the asset was disposed of. The effect is a reversal of relief already taken, not the ordinary balancing adjustment.
That distinction is the point. On a normal disposal, the balancing adjustment compares the disposal value with the residual expenditure, so an asset sold cheaply produces a small charge, or a balancing allowance. Paragraph 71 does not work that way. The charge is measured by the allowances given, not by what the asset fetched. An asset relieved in full over two years and disposed of inside that window therefore stands to have the whole of that relief charged back, whatever the sale realised. The ordinary rule and the two-year rule can produce materially different answers on identical facts.
The paragraph carries an exception where the disposal arises by reason of the death of the person, and for any other reason the Director General thinks appropriate. The second limb is a discretion, not an entitlement. A commercially genuine disposal — an abandoned project, an early upgrade, a change in what the business does — may well attract it. The company cannot assume the outcome in advance, and where a disposal inside two years is in prospect the position is one to raise with the Inland Revenue Board on the facts rather than to assume.
Two further points follow. Paragraph 71 is not confined to accelerated allowances: it applies to any asset owned for less than two years. It bites harder here only because the accelerated allowance puts so much more relief at risk within the window. And the two-year period runs from acquisition, not from the year of assessment, so a fixed asset register that records only the year of purchase will not answer the question.
Classification is where disputes usually arise
In practice the argument is less often about the rate than about what the asset is. Schedule 3 relieves qualifying plant expenditure, not capital expenditure at large: land is outside it, and expenditure on buildings and on intangibles is dealt with separately or not at all. Within qualifying plant, the boundary between heavy machinery, plant and general machinery, and other assets is not settled by a published list and turns on the nature and use of the asset. The Inland Revenue Board publishes rulings on what constitutes qualifying plant and machinery, and a classification material to the amount claimed is better settled against that material before the return is filed than defended afterwards. Not every capital purchase made inside the window qualifies, and the assumption that it does is the more expensive error of the two.
Before a purchase is brought forward
- Establish whether the expenditure is qualifying plant expenditure at all, and identify which category it falls into, before considering any accelerated rate.
- For machinery, confirm whether the direct acquisition from a local manufacturer condition is satisfied, and keep the evidence that shows it.
- Confirm the expenditure is incurred within the qualifying window and record the date on which it was incurred, not merely the year.
- Confirm the company has adjusted income capable of absorbing an accelerated allowance in the year it arises; where it does not, assess what happens to the unabsorbed amount before treating acceleration as a benefit.
- Assess honestly how long the asset is expected to remain in the business, including the possibility of an early upgrade or a change of plan.
- Where a disposal within two years is foreseeable, quantify the charge paragraph 71 would produce and weigh it against the timing benefit before committing.
- Maintain a fixed asset register capable of showing acquisition and disposal dates asset by asset, since the two-year test cannot be applied to a pooled balance.
General-information limitation
This article is general information about capital allowances under Schedule 3 of the Income Tax Act 1967 and the accelerated allowance proposed in Budget 2026. It is not tax advice for a particular company, and it does not determine whether any expenditure qualifies, which category an asset falls into, or how paragraph 71 would apply on a given disposal. Rates, qualifying categories and the closing date of the window are set by instruments that can be amended, and the measure described here is time-limited. Confirm the current position against the Inland Revenue Board’s own published material, and obtain advice on your own facts where the amount is material.
To discuss capital expenditure timing for your own company, see Saifudin & Co’s tax advisory and compliance services.