100% capital allowances can be obtained for expenditure on environmentally beneficial technology. This enables businesses to write off the whole capital cost against their profits in the year in which the expenditure is incurred and therefore to obtain valuable tax relief which can improve cashflow.
Capital allowance basics
Depreciation is not allowable as a deduction from the profits for tax purposes. Instead capital allowances allow tax relief for expenditure on plant and machinery. For further details of capital allowances see Out-Law guide to Capital Allowances for property transactions.
Relief is usually given at the rate of 18% per annum on a declining balance basis.
100% first year allowances are available for certain environmentally beneficial technologies which qualify for enhanced capital allowances (ECAs).
Plant and machinery which is designated as an integral feature only qualifies for allowances at 8% unless it qualifies for ECAs. The list of integral features is:
· electrical systems (including lighting systems);
· cold water systems;
· space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system;
· lifts, escalators or moving walkways; or
· external solar shading.
Integral features are deemed to be plant and machinery for capital allowance purposes so this enables enhanced allowances to be claimed on items such as external solar shading which would not otherwise have constituted plant and machinery.
Allowances are not available to tax-exempt property owners or to those (such as developers) holding property on trading account.
Although environmentally beneficial technologies tend to be more expensive, the cashflow benefit of the 100% first year tax relief can outweigh these additional costs. For example expenditure of £10,000 on assets qualifying for ECAs would give tax relief worth £2,400 in year one (at a 24% corporation tax rate) whereas expenditure of £9,000 not qualifying for ECAs would give tax relief worth only £388 in year one (although further relief on declining amounts would be available in subsequent years).
Another scheme giving 100% allowances is the business premises renovation allowance (BPRA) scheme which provides a 100% tax relief to property owners on money spent on conversion or renovation of empty business properties in specified 'assisted areas'.
For further details of BPRA see Out-Law Guide to Business Premises Renovation Allowance.
There are two categories of plant and machinery which currently qualify for ECAs:
· Energy-saving plant and machinery; and
· Water conservation plant and machinery.
Allowances are only available for items which constitute "plant and machinery" and which are qualifying technologies designated by statutory instrument. Qualifying items are set out on the website.
If an asset is purchased that is not environmentally beneficial plant and machinery in itself, but includes components that are, you have to identify the proportion of the expenditure incurred by the buyer that can qualify for 100% first year allowances. The normal rules for allocating expenditure (just and reasonable apportionment) do not apply, instead the proportion of the expenditure incurred on the provision of the asset that qualifies for 100% allowances will be the amount specified in the relevant Treasury order for the particular components included in that asset.
Energy-saving plant and machinery
The following categories of technologies are currently within the scheme for energy saving plant and machinery:
· Air-to-air energy recovery
· Automatic monitoring and targeting equipment
· Boiler equipment
· Combined heat and power
· Compact heat exchangers
· Compressed air equipment
· Heat pumps
· Heating ventilation and air conditioning equipment
· High speed air hand dryers
· Motors and drives
· Pipework insulation
· Refrigeration equipment
· Solar thermal systems
· Uninterrruptible power supplies
· Warm air and radiant heaters
The list and eligibility criteria are reviewed annually. You can check whether a particular product is on the list at a Government website about ECAs.
Water conservation plant and machinery
The following categories of technologies are currently within the scheme for water conservation plant and machinery:
· Cleaning in place equipment
· Efficient showers
· Efficient taps
· Efficient toilets
· Efficient washing machines
· Flow controllers
· Leakage detection equipment
· Meters and monitoring equipment
· Rainwater harvesting equipment
· Small scale slurry and sludge dewatering equipment
· Vehicle wash water reclaim units
· Water efficient industrial cleaning equipment
· Water management equipment for mechanical seals
· Water reuse systems
The DEFRA website has a detailed list of individual products which have been accepted as qualifying for enhanced allowances.
However for automatic monitoring and tracking systems and combined heat and power systems, being listed alone is not enough, a certificate of energy efficiency also has to be obtained from DEFRA.
For lighting and pipework insulation, individual products are not listed. Anyone claiming ECAs in respect of them has to show that the relevant standards have been met. This can be achieved by seeking confirmation from the manufacturer or from the contractor installing the lighting or pipework insulation that it meets the standard.
In addition to being on the list the item must constitute "plant or machinery" for capital allowance purposes.
ECAs are only available for expenditure on unused and not second-hand qualifying equipment. They will not therefore be available where a used building is purchased unless the purchaser is refurbishing the property.
Enhanced allowances are not available if the assets constitute long life assets – broadly those with an economic life of at least 25 years.
ECAs are claimed in the same way as normal capital allowances – on the tax return for the period in which the expenditure is incurred. However appropriate records will need to be obtained and retained to prove that assets qualifying for ECAs were installed and to show the expenditure incurred on such assets. This will be particularly relevant where environmentally beneficial components are included in an asset which does not itself qualify for ECAs and apportionments have to be made.
· Those commissioning new buildings or refurbishing existing buildings should consider the extent to which they can incorporate items qualifying for ECAs as the 100% tax relief could provide a very welcome cashflow boost. ECAs need to be considered at an early stage to maximise their availability.
· Those incurring expenditure qualifying for ECAs need to ensure that they obtain and retain all the information needed to claim ECAs.
· The inclusion of ECA compliant equipment can help to achieve an improved rating for Energy Performance Certificate purposes.