Briefings

Enhanced Capital Allowances

Under the Kyoto Protocol, the UK is committed to achieving a 12.5% reduction in greenhouse gas emissions by 2010. In practice the Government has set the UK target at 15% reduction and has put in place a number of incentives to ensure that this target is achieved.

A central plank to the achievement of this target of 15% reduction is 'Good Quality' Combined Heat & Power (CHP)*1 but another, and perhaps more immediately relevant measure that will have instant appeal to all profitable companies, especially those property companies that are investing in new plant, upgrades and refurbishments, are the 100% first year capital allowances (ECAs) which are available for investment in approved energy saving technologies.

The qualifying energy saving technologies are listed on the Government's website in the Energy Technology Product List, which contains around 1600 items of equipment that are eligible for ECA. These items range from energy efficient motors and drives to new energy efficient boilers, lighting, and Building Management Systems (BMS). These products are in some cases marginally more expensive than non-compliant competing products, but seldom by such an amount as to eliminate the advantage of the increased tax allowance.

The 100% ECA is available for all investment made after April 5, 2001 and is instead of the 25% usually allowed. The enhanced capital allowances are claimed in the same way as other capital allowances on the Corporation Tax Return for companies and on the Income Tax Return for individuals and partnerships. It is self administered with the usual threat of prosecution and fines for any false claims submitted.

Claims must be based on the actual costs incurred. Where a qualified item has been purchased that is not already incorporated into a larger item of plant and machinery the price used as the basis of the claim must be the actual price paid for the item.

*1 = CHP is the on-site generation of electricity using either a gas turbine or a reciprocating spark ignition gas engine, concurrent with the recovery of waste heat from the actual generation.

Where a larger item of plant or machinery that has a qualifying product already installed in it as a component is acquired, only that proportion of the cost that relates to that qualifying component will attract enhanced capital allowances, the remainder of the equipment will attract capital allowances at the normal rate.

The amount that can be claimed when buying a qualifying product that is incorporated into a larger piece of equipment has been calculated by Government and is detailed on the government web site under 'claim values'. It includes provision for integrating it into the secondary equipment.

The words 'on the provision of plant or machinery' in the Capital Allowances Act are interpreted narrowly so as to exclude remote or indirect expenditure. Some common types of cost that may be included are detailed below with appropriate qualifications:

• Transportation and installation costs should be regarded as expenditure on the provision of machinery or plant. These can include, for example, the costs of transport, cranage costs to lift machinery into place, project management costs, installation, modifications to existing plant and machinery, and commissioning.
• Professional fees qualify only if they are directly related to the acquisition and installation of assets that are plant or machinery. Fees incurred on such things as feasibility studies or design work are generally considered to be too remote from the acquisition and installation to qualify. However the eligibility of such costs is a question for consideration by the Inspector of Taxes based on the particular circumstances of the case.
• Costs of alteration to an existing building incidental to the installation of qualifying plant and machinery are also eligible for ECA.

The following is an example of the additional benefits typically obtainable under the ECA scheme:

Example of ECA in action. Installation of 35kW fan motor
Variable Speed Drive (VSD)

Clearly the ECA scheme gives a material benefit to both investor and user.

We can help clients to take advantage of the ECA scheme by identifying opportunities on proposed new investments or by investigating expenditure already made since the launch of the scheme, finding qualifying expenditure and so ensuring that the tax liabilities are minimised.

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A BSEE Article
Article introduction reproduced with permission