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Enhanced Capital Allowance

What it is, how you can claim and the business benefits

Key Features of the Scheme

  • All businesses can claim Enhanced Capital Allowances (ECA) on their qualifying expenditure regardless of size, industrial or commercial sector or location.
  • Enhanced Capital Allowances permit the full cost of the investment in specified technologies to be relieved for tax purposes against taxable profits of the period of the investment.
  • The qualifying technologies have to meet the published energy saving criteria. They are published in the Energy Technology Criteria List, where the criteria will be reviewed on an annual basis.
  • Only investments in new and unused plant

Claiming the Allowances

The ECAs are claimed in the same way as other capital allowances on the Corporation Tax Return for companies and the Income Tax Return for individuals and partnerships. Neither the product nor the installation need to be provided with documentation to prove qualification for the Enhanced Capital Allowance provided the item is on the relevant Energy Technology Product List on the ECA website.

Capital Allowances

Basic capital allowances are given at 25% of expenditure on capital equipment on a reducing balance basis. This means that you don't have to pay tax on 25% of the expenditure incurred when buying capital equipment. Small businesses qualify for a first year allowance, currently 40%, and 25% thereafter on the reducing balance basis.

Therefore on equipment costs of £1,000, the business reduces its taxable profit by £250 for the first year when expenditure is made. The balance, £750, is taken forward to the next year. If the business is paying tax at 30% the first year saving is £75. In the second year the business will receive a 25% allowance on the balance remaining i.e. £750. The value of the allowance in the second year is therefore the value of not paying tax on £187.50, which is £56.25. The allowance is given on the remaining balance every tax year. After a period of ten years the allowance will have been claimed on approximately 95% of the total expenditure.

Enhanced Capital Allowances

Enhanced capital allowances are given at 100% of the expenditure in the first year. This means that you don't have to pay tax on 100% of the expenditure incurred when buying qualifying capital equipment. Therefore on equipment costs of £1,000, the business reduces its taxable profit by the full £1,000 for the first year when the expenditure is made. The first year saving from the ECA is £300, much greater than the standard capital allowance first year saving of only £75.

Example

These calculations are for a large business that pays corporation tax at 30%. Smaller businesses will pay tax at a lower rate. The assumed installed value of the qualifying Heat Pump system is £4,000. It shows the effect of the Enhanced Capital Allowance on the qualifying heat Pump system compared to a non-listed item of the same value.

Capital Allowance
Enhanced
Enhanced Capital
Allowance Enhanced
Tax Rate 30% 30%
% of expenditure to which allowance applies 25% 100%
Equipment cost £4000 £4000
Taxable amount reduced by 25% of £4000 = £1000 100% of £4000 = £4000
First year saving 30% of £1000 = £300 30% of £4000 = £1200
Balance brought forward to second year £4000 - £3000 = £1000 £0
Taxable amount reduced by 25% of £3000 = £750 £0
Second year saving 30% of £750 = £225 £0

Climate Change Levy calculator

Understand the financial implications to your business at:
www.amcho.com/climate-change-levy.htm

How to Claim

You will be able to claim 100% first year capital allowance on the expenditure incurred if the item that has been purchased is on the Energy Technology Product List before or at the time that:

  1. you are contractually obliged to pay for the equipment; or
  2. you enter into a leasing agreement for the equipment.

The allowance can be claimed on the cost of the product, along with any costs that are directly associated with the provision of the product such as installation costs. Wherever you are able to identify how much you have spent on qualifying equipment (for example from an invoice) you must use this as the basis of your claim.

For Variable Speed Drives then the claim values shown on the Energy Technology List should be used. Remember to keep the relevant records for tax purposes e.g. take a dated screen-print of the Energy Technology List showing the qualifying product direct from www.eca.gov.uk/etl.

ECAs are claimed as part of normal income / corporation tax return calculations - see your tax return form and accompanying notes.

Benefits

Businesses that invest in the technologies that qualify for the enhanced capital allowances can obtain a significant cash flow boost because they receive tax relief for their investment much earlier than would otherwise be the case.

Importantly, technologies qualifying for an ECA are energy efficient and thus lead to significant long-term financial benefits in addition to the tax rebate. Businesses can benefit by investing in energy efficient technologies that reduce their energy costs and climate change impact.

Climate Change Levy: What Your Business Needs to Know

Sources

There has been a lot of speculation about what can be claimed for under the ECA scheme. The information provided here is taken from data provided by the Carbon Trust and the Inland Revenue.

Links

Learn more about the Climate Change Levy and Enhanced Capital Allowance:

www.thecarbontrust.co.uk/energy/pages/home.asp
www.inlandrevenue.gov.uk
www.eca.gov.uk