The Enhanced Capital Allowances (ECAs) legislation represents a Government initiative designed to encourage businesses to use more environmentally-friendly equipment and machinery, in an attempt to improve the carbon footprint of businesses in the UK.
ECA covers such items as:
- Energy-saving and water conservation plant and machinery
- Low carbon dioxide emission vehicles
- Natural gas and hydrogen refuelling systems
The scheme allows 100% of the cost of qualifying equipment and machinery to be written off against taxable profits in the first year after purchase. This means that £100,000 of qualifying expenses, at the current tax rate, would reduce a business’s tax bill by £19,000.
This scheme thus provides a far higher saving for companies than any other allowance currently available on items in this category. In comparison, £100,000 of expenditure under current basic capital allowances would only net a business a saving of £3,420.
ECA can be claimed alongside the Annual Investment Allowance (AIA), which further allows up to £200,000 of capital expenditure as a deduction against tax.
For companies who make a loss in the year following the purchase of this equipment, ECA can still benefit them, by paying 19% on any losses that qualify under the scheme. To follow the previous example, if a company has spent £100,000 on qualifying plant and machinery and made a loss, the Government will give the company back £19,000 in cash. The maximum amount allowed in this case is £250,000, but is limited to how much PAYE and National Insurance Contributions the company has paid throughout the year.
The Government announced in the Autumn budget that the scheme is intended to be pushed forward through to March 2023, reducing the rate of the claim to ? of the Corporation Tax Rate.
To meet the requirements for Enhanced Capital Allowances, plant and machinery purchase must:
- Be unused and brand new (i.e. not second hand)
- Be a listed product, or meet the energy saving or water conservation standards as set by the Carbon Trust
The Carbon Trust is in charge of the Energy Technology List (ETL), which is the full list of products and equipment that qualify for ECA. At the moment, the ETL is made up of two lists:
Energy Technology Criteria List (ETCL)
A list of criteria which any qualifying equipment must meet, regarding the energy-efficiency and performance standards set out by the Carbon Trust.
Energy Technology Product List (ETPL)
A register of the products which are currently understood to be compliant with the criteria set out in the ETCL
Items which currently qualify under the scheme include:
Energy Saving Technology
- Air to air energy recovery
- Automatic Monitoring and Targeting
- Combined heat and power sources
- Compressed air equipment
- Heat pumps for space heating (includes ground source heat pumps)
- HVAC zone controls
- High speed hand air dryers
- Lighting and controls
- Motors and drives
- Pipework insulation
- Warm air heaters
- Refrigeration equipment
- Solar thermal systems
- Uninterruptible power supplies
Water Conservation Technology
- Cleaning in place equipment
- Efficient showers, taps and toilets
- Efficient washing machines
- Flow controllers
- Leakage detection equipment
- Meters and monitoring equipment
- Rainwater collecting equipment
- Small-scale slurry and sludge dewatering equipment
- Vehicle wash water reclaim units
- Water-efficient industrial cleaning equipment
- Water management equipment for mechanical seals
This list is reviewed and updated annually to take into account new technologies and developments in the energy efficiency of current technology. The lists above are up-to-date, but it is worthwhile checking regularly to see how the list is changing as you may be entitled to claim for more items than you realise.
In order to qualify for the full amount of ECA, businesses must own the equipment outright. Contributions from other parties (such as landlords or grants) may limit the ability to get the allowance, or limit how much companies are able to claim. By the same token, though, if businesses have contributed towards the cost of qualifying equipment for another company, they may be able to claim some allowance for this.
ECA and AIA are not available for any equipment which is installed in a residential property, but may apply when they are fixed in the common areas of a shared residential development (i.e. lifts in residential blocks)
Advantages of Enhanced Capital Allowances
Aside from the fact that claiming ECA is the best way to recoup a sizeable chunk of the tax that you need to pay at the end of the financial year, this scheme also helps your business to reduce its environmental impact.
In the current climate, companies are coming under increased pressure to take steps to reduce their carbon footprint and make less of an impact on the environment as a result of their business practices. Many businesses, as a result of their own mission to reduce their environmental impact, are choosing to work with environmentally-conscious suppliers, meaning that companies who make the effort to make ethical changes in their basic processes can find that they are making connections with other companies which are strategically valuable in their drive to be ever more eco-friendly.
In addition, a company which chooses to use ECA qualifying items in order to claim this allowance may also be able to improve their Building Research Establishment Environmental Assessment Method (BREEAM) ratings. This makes it more likely that they will be entitled to a better Improve Energy Performance Certification rating.
How To Claim Enhanced Capital Allowances
Claiming an ECA is a fairly straightforward process, and you can simply claim through your corporation tax or income tax return when you file it. If you are working with an accountant to file your tax return, it is a good idea to let them know as early as possible that you intend to claim ECA, and what expenditure you intend to incur in advance, so that they are able to work out what information they need to complete your tax return accurately.
You will need to keep full records of all eligible purchases, as well as details of any installation costs, and have this information available to provide as supporting evidence when you make your claim.
The governments approach to the “green” question has been haphazard over the years, and across the different political parties. Different combinations of carrot and stick have been used to varying degrees of success.
However Enhanced Capital Allowances and the Annual Investment Allowance represent a straightforward approach to the issue. They do have some “gotchas” however, so getting the advice of professional firm is usually the best approach to maximising your tax savings.
The team at TFMC are here to help on this, as well as with all your other accountancy requirements. Please call on 0800 470 4820 or email [email protected] to find out more.