Businesses which invest in energy-saving plant or machinery may be able to take advantage of an additional tax break.
Capital expenditure is covered by the Annual Investment Allowance (AIA), which 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). The main WDA is currently 18%.
There are, however, some types of expenditure which are only eligible for a WDA of 8%. There are also separate rules for cars, which do not qualify for the AIA.
In addition, there may be occasions when a business could benefit from Enhanced Capital Allowances (ECAs).
What is an ECA?
ECAs are designed to encourage investment in energy-efficient equipment, the initial cost of which often can be more expensive than other products. ECAs offer 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.
An ECA may have the effect of turning an accounting profit into a tax loss. Where an ECA claim by a company (but not an income tax business) creates or increases a tax loss, the loss attributable to ECAs can be surrendered for a cash credit.
The loss can only be exchanged for a cash credit if it has first been relieved against other profits, including group relief. In other words, where the unrelieved loss would otherwise be carried forward an exchange for a cash credit is possible. The cash credit was 19% until 31 March 2018 but has now reduced to two-thirds of the corporation tax rate in force for the accounting period. The maximum cash exchange is either the company’s PAYE and national insurance liabilities for the year in which the claim is made, or £250,000 if greater.
ECAs are claimed via the corporation tax return or income tax return and it is important to keep records of any purchases or installation costs.
Qualifying energy-saving technology
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 taps, toilets and industrial cleaning equipment are also eligible.
The Energy Technology List (ETL) identifies particular products which perform to ultra-high levels of energy efficiency. A full list of qualifying products can be found here: https://bit.ly/1qG4ltG.
The Water Technology list consists of 14 categories of water technologies on which ECAs can be claimed, and can be found here: https://bit.ly/2HLy1hj.
The list of eligible assets is updated frequently. Claims for ECAs can sometimes fail as a result of misinterpretation of exactly which products qualify, and it is important that the list is checked when relevant expenditure is made.
We can help with claiming enhanced capital allowances, as well as advising on the timing of capital expenditure. Please contact us for further advice and assistance.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.