Businesses which invest in energy-saving plant or machinery may be able to save tax by taking advantage of an HMRC tax break.
Using ECAs on capital expenditure to save tax
For many businesses, spending on capital items will be covered by the Annual Investment Allowance (AIA). The AIA gives full tax relief for capital expenditure on most plant and machinery in the year of purchase, up to an annual limit of £200,000. Where expenditure exceeds this limit, an annual writing down allowance (WDA) is used for the balance of the expenditure. This means that the business can deduct a percentage of the value of capital items from its profits each year.
WDA is currently 18% but some types of expenditure are only eligible for WDA at 8%. Cars do not qualify for AIA.
There are occasions when a business can benefit from Enhanced Capital Allowances (ECAs). ECAs are designed to encourage investment in energy-efficient equipment, although the regime is a little less favourable now than it was. The initial cost of energy-saving equipment can can be higher than other types of plant and machinery so ECAs provide accelerated tax relief by giving a 100% capital allowance in the year of purchase. A business will therefore benefit from using ECAs where total capital expenditure is more than £200,000.
Claiming ECAs may also result in an accounting profit becoming a tax loss. If a claim for ECA creates or increases a tax loss, in some circumstances the loss caused by the ECA can be surrendered for a cash credit. Before 31 March 2018, the cash credit was 19% but it is now two thirds of the Corporation Tax rate in force for the accounting period.
What type of equipment is eligible?
You can claim ECAs on the purchase of specific high-performance energy-efficient equipment, such as electric motors, boilers, air conditioning and refrigeration systems. Products which use water efficiently – such as water efficient taps, toilets and industrial cleaning equipment – are also covered.
The Energy Technology List is a government-managed list of products which perform to ultra-high levels of energy efficiency. Use this list to check whether your capital items qualify for the ECA scheme. The Water Technology list gives details of 14 categories of water technologies on which ECAs can be claimed.
Supporting you with your claim
The list of eligible assets is updated frequently so it is important to check the list at the time the relevant expenditure is made. A claim for ECA may fail due to misinterpretation of exactly which products qualify. ECAs should be claimed through the corporation tax return or income tax return and you are advised to keep records of purchases or installation costs.
If you plan to purchase energy saving equipment, please contact us at an early stage so that we can support you to make a trouble free claim.
If you are uncertain when would be the best time to invest in new equipment, we would be pleased to help you get a clear picture of tax and profitability for your business. Speak to your usual RfM advisor, contact one of our offices or enquire online.
For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.