The Enhanced Capital Allowance

Introduction

The Enhanced Capital Allowance is a key part of the Government's plan to tackle climate change and was introduced to encourage businesses to invest in low carbon energy saving equipment to assist the UK in meeting its Kyoto target of reducing carbon emissions by 20%. It provides businesses with an enhanced tax relief in exchange for investing in energy efficient plant and machinery.

The equipment installed must be selected from the Energy Technology Product List which was first published in 2001 and is updated regularly. For a product to appear on the Energy Technology Product List it must meet the energy saving criteria as defined in the Energy Technology Criteria List.

The scheme is open to all businesses which pay UK corporation or income tax, regardless of size, sector or location and provides 100% first year capital allowances on investments in new and unused energy saving equipment. Certain costs involved in the provision of energy saving plant and equipment such as transport of the equipment to the site and some direct installation costs can also be claimed for.

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Benefits

An Enhanced Capital Allowance provides 100% tax relief on any investment in energy saving equipment in the same tax year as the purchase is made. Therefore a business paying corporation tax at 30% will receive 30p tax relief for every £1 invested in energy saving equipment.

As well as the added tax incentive, equipment that is energy saving will cost less to run, which will reduce both a company's energy bills and Climate Change Levy. Hence there exist significant financial benefits to investing in energy saving equipment.

Furthermore the public is increasing concerned by climate change and often look at how environmentally friendly a company's policies and production methods are before deciding to invest in its products and services. A tenant is much more likely to rent a property that has an energy saving boiler installed as this will mean lower energy bills for them - leaving them more money to pay the rent!

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What is covered?

The Energy Technology Product List is split into the groups listed below, and then further into 54 sub technologies, such as speed motors and biomass boilers.

It is also possible to claim for a qualifying product which comprise a component (a motor for example) in a larger piece of plant or machinery which does not itself qualify for the Enhanced Capital Allowance.

The 16 groups currently on the Energy Technology Product List are:

  • 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 (HVAC) equipment
  • Lighting
  • Motors and drives
  • Pipework insulation
  • Radiant and warm air heaters
  • Refrigeration equipment
  • Solar thermal systems
  • Uninterruptible power supplies

An up to date list can be found on the Enhanced Capital Allowance website, a link to which is provided in the external links section at the bottom of the page.

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Who is eligible?

All businesses which pay UK corporation or income tax are eligible, irrespective of size, sector or location.

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A sample calculation

Capital allowances enable businesses to write off the capital cost of purchasing plant and machinery such as cars, computers, boilers and motors against their taxable profits. The general rate of capital allowances is 25% per year on a reducing balance basis.

For example if a business purchases a new boiler for £1,000, it could claim capital allowances of £250 (25% of £1,000) against the taxable profits of the period of investment. Assuming the company pays corporation tax at 30% the effect of the capital allowance for spending on the boiler in the period of investment would be to reduce the business's tax bill by £75 (30% of £250).

However, if the business invested the same amount in an energy saving boiler from the Energy Technology Product List, it could claim a 100% capital allowance of £1000 against the taxable profits of the year of investment. Again, assuming that the company pays corporation tax at 30% the effect of the first year allowance would be to reduce the business's tax bill by £300 (30% of £1,000).

The following table illustrates the effect of the enhanced capital allowance as opposed to the normal allowance for a company paying tax at 30%. There are no further costs in years 2 -10 for the Enhanced Capital Allowance as 100% of the allowance is claimed in year 1.


Year

Normal

capital

allowance

Enhanced

capital

allowance

Capital Purchase

Allowance

Tax Reduction

Capital Purchase

Allowance

Tax Reduction

1

£1000

£250

£75

£1000

£1000

£300

2

£750

£187.50

£56.25

0

-

-

3

£562.50

£140.63

£42.19

0

-

-

4

£421.88

£105.47

£31.64

0

-

-

5

£316.41

£79.10

£23.73

0

-

-

6

£237.30

£59.33

£17.80

0

-

-

7

£177.98

£44.49

£13.35

0

-

-

8

£133.48

£33.37

£10.01

0

-

-

9

£100.11

£25.03

£7.51

0

-

-

10

£75.08

£18.77

£5.63

0

-

-

TOTAL

£1000

£943.69

£283.11

£1000

£1000

£300

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How to Claim

Enhanced Capital Allowance claims should be submitted as part of your normal corporate or income tax return. It is therefore important to retain all the documentation relating to your claim which may include:

  • Invoices
  • Dated screen prints from the ECA website
  • Information from the company that installs the equipment

HM Revenue and Customs may investigate any aspect of a tax return, therefore it is important to ensure that you have to hand all the necessary evidence to support your claim.

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Further Information

Further information on the Enhanced Capital Allowance can be found on the ECA website, which is accessible by clicking on the link provided in the external links section at the bottom of the page. Links are also provided to the websites of HM Revenue and Customs and the Energy Saving Trust.

The following links are not part of the Haringey Council website. Please read our legal disclaimer before using these links