Save energy, save tax - with enhanced capital allowances

Did you know that a business which invests in energy-saving plant or machinery may be able to take advantage of an HMRC tax break?

Saving tax

For many businesses, capital expenditure will be covered by the Annual Investment Allowance (AIA). AIA gives full tax relief for capital expenditure in the year of purchase, and covers most plant and machinery, up to an annual limit of £200,000. Where expenditure exceeds the AIA, the balance is dealt with via an annual writing down allowance (WDA). WDA is currently 18%. There are however, some types of expenditure which are only eligible for WDA at 8%. There are also separate rules for cars, which do not qualify for AIA.

But there can also be occasions when a business can benefit from Enhanced Capital Allowances (ECAs) - although the regime is a little less favourable now than it was. ECAs are designed to facilitate investment in energy-efficient equipment, the initial cost of which can be greater than other products. ECAs provide accelerated tax relief by giving a 100% capital allowance in the year of purchase. A business can therefore benefit where total capital expenditure is more than £200,000. ECAs may also have the effect of turning an accounting profit into a tax loss. Where an ECA claim by a company creates or increases a tax loss, then the loss attributable to ECAs can be surrendered for a cash credit in some circumstances. Until 31 March 2018, the cash credit was 19%, but is now two thirds of the CT rate in force for the accounting period.

Saving energy

ECAs are available on the purchase of specific high-performance energy-efficient equipment, such as boilers, electric motors, air conditioning and refrigeration systems. Water-efficient technology products such as water-efficient taps, toilets and industrial cleaning equipment are also eligible.

The Energy Technology List identifies particular products which perform to ultra-high levels of energy efficiency. It is investment in these products which qualifies under the scheme. The list can be found here The Water Technology list consists of 14 categories of water technologies on which ECAs can be claimed and can be found here

Your business choices

The list of assets eligible for ECAs is updated frequently. Claims can fail through misinterpretation of exactly which products qualify, and it is important that the list is checked when relevant expenditure is made. ECAs are claimed via the corporation tax return or income tax return, and records of any purchases or installation costs should be kept. Please do contact us at an early stage so that we can guide you through a trouble-free claim. And whatever the nature of your capital expenditure, we would be delighted to help you take an overall look at tax and profitability in your business, working out the best time to invest in new equipment.