The enhanced capital allowances (ECA) scheme has been with us for over 15 years, but is often overlooked as an effective way to reduce tax liabilities.
The ECA scheme was introduced in 2001 to encourage business investment in energy efficient equipment. Approved ECA expenditure allows an organisation of any size to write-off the full cost of qualifying, energy-efficient purchases against their corporation or income tax in the year of investment. In ‘real’ terms, the participating business will reduce their tax bill and improve their cash flow position, with the potential of realising further energy cost savings, and reduce their carbon footprint.
For expenditure to qualify for ECAs, the purchased equipment must meet the technical requirements set out on the ‘Energy Technology Criteria List’ (ETCL). Fortunately, many products on the market have already received approval for ECAs and meet the efficiency requirements set by the Carbon Trust, a recognised, independent body. The equipment that ‘pre-qualifies’ for ECA are included on the ‘Energy Technology Product List’ (ETPL)
Technology that does not feature on the ETPL can still qualify for ECAs however, provided it meets the set criteria. Claimants will need to provide comprehensive supporting evidence in order to claim non-listed ECAs, but the necessary technical information can usually be provided by the manufacturer or installer.
To illustrate an example of an ECA claim, presume a business purchased £100,000 of qualifying, energy-efficient lighting in 2017. Under normal capital allowances, the company would receive special-rate relief of 8% capital allowances for qualifying ‘integral features’. This would ultimately translate into a real tax cash saving of £1,520, with the saving reducing each subsequent year. Under ECA, the company creates a real tax cash saving of £19,000 in 2017, with no further capital allowance relief in subsequent years.
Where a business does not have taxable profits to set the ECA claim against, it may elect to take a tax credit in lieu of the tax deduction, equal to 19% of the cost of the equipment.
ECAs offer a triple tiered benefit to businesses by reducing tax payable in the year of expenditure, reducing energy bills for the foreseeable future and making the organisation more socially responsible by reducing the carbon footprint.
Despite generating a cash saving from a tax perspective, energy efficient equipment typically is costlier than conventional alternatives. Business decision-makers should remain prudent and adequately analyse whether they will benefit from the ECA scheme. It is important to consider that energy bills will likely reduce, and also be conscious of the additional goodwill generated from being socially responsible.
As for all capital projects, considering the tax implications at an early stage is important. The identification of, and inclusion of, ECA qualifying assets at the planning stage can improve the overall efficiency of the project.