This guide was last updated in November 2018.
Capital allowance basics
Depreciation is not normally 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.
However, businesses can deduct from their profits the full value of items they acquire which are within the annual investment allowance. This usually applies to expenditure of up to £200,000 a year, but has been temporarily increased to £1 million for 2019 and 2020.
For expenditure that exceeds the annual investment allowance, relief is usually given at the rate of 18% per annum on a declining balance basis.
100% first year allowances are currently available for certain energy saving or environmentally beneficial technologies which qualify for enhanced capital allowances (ECAs). However, it was announced in the 2018 budget that the scheme will end on 31 March 2020 for companies and 5 April 2020 for unincorporated businesses.
Plant and machinery which is designated as an integral feature only qualifies for allowances at 8% (6% from April 2019) 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 energy saving / 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 £1,900 in year one (at a 19% corporation tax rate) whereas expenditure of £9,000 not qualifying for ECAs would give tax relief worth only £307 in year one (although further relief on declining amounts would be available in subsequent years).
There are two categories of plant and machinery which currently qualify for ECAs:
- Energy-saving plant and machinery; and
- Environmentally beneficial plant and machinery (eg plant and machinery for improving water quality and reducing water use).
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 a website.
Enhanced allowances are also available for expenditure on cars with low carbon dioxide emissions, gas refuelling stations and electric charging points but these categories are not considered further in this guide. However, 100% allowances for electric charge points will be available until 31 March 2023 for companies and 5 April 2023 for unincorporated businesses.If an asset is purchased that is not energy saving or 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
- Compressed air equipment
- Heat pumps
- Heating ventilation and air conditioning equipment
- High speed air hand dryers
- Motors and drives
- Pipework insulation
- Radiant and warm air heaters
- Refrigeration equipment
- Solar thermal systems
- Uninterrruptible power supplies
- Waste heat to electricity conversion equipment
The list and eligibility criteria are reviewed annually. The government also manages a list of products which it accepts satisfy the criteria for energy saving and energy efficient products.
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
- Grey water recovery and reuse equipment
- 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 government has a detailed list of individual products which have been accepted as qualifying for enhanced allowances.
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.
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.
A company may claim a payable first year tax credit in some circumstances if it is loss making.
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.
In view of the 2020 abolition of ECAs, the timing of expenditure should be considered carefully to maximise the relief.
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.