In the March 2008 Tax Insider, I dealt with the changes to capital allowances on plant and machinery, but in this article I want to concentrate on the “Enhanced Capital Allowances” for plant and machinery that is regarded as particularly eco-friendly.
Generally speaking when a business spends money on plant and machinery it is entitled to claim ‘capital allowances’ on this expenditure. The rate of capital allowances depends on the nature of the plant and machinery concerned.
Annual Investment Allowance
There is an allowance of £50,000 per year for expenditure on any kind of plant and machinery (except cars) which qualifies for 100% relief. The various categories set out below are therefore mainly relevant to businesses spending more than £50,000 per year on plant and machinery, although in the case of a group of companies or of businesses that are “related”, there is only one amount of £50,000 for all the entities concerned, to be shared out as they wish.
Writing Down Allowance
The default position is that the plant and machinery costs can be written off at 20% per year, so if £1,000 is spent £200 can be written off in the first year, £160 in the second year, and so on. There are, however, exceptions to this:
‘Long life’ plant and machinery
This is plant and machinery which is expected to last for more than 25 years from new, and the writing down allowance is 10% instead of 20%.
Plant and machinery integral to a building
Plant and machinery is ‘integral’ to a building if it consists of:
• Electrical systems (including lighting systems);
• Cold water systems;
• Space or water heating systems, or powered systems of ventilation air cooling or air purification;
• Lifts, escalators and moving walkways;
• External solar shading (‘brise soleil’).
These also attract writing down allowances of 10%.
100% First Year Allowances
These are available for specified energy saving plant and machinery and certain other environmentally friendly items.
• Energy saving plant and machinery;
• Environmentally beneficial plant and machinery;
• Qualifying low emission cars;
Energy saving plant and machinery
In order to qualify, the product must be on ‘the technology list’ which is a list of different types of technology approved by DEFRA.
The broad categories are:
• Combined heat and power;
• Pipe insulation;
• Variable speed drives;
• Thermal screens;
• Refrigeration equipment;
• Heat pumps for space heating;
• Radiant and warm air heaters;
• Solar thermal systems;
• Compressed air equipment;
• Automatic monitoring and targeting equipment;
• Air – to – energy recovery equipment;
• Compact heat exchangers;
• Heating ventilation and air conditioning zone controls;
• Compressed master controllers;
• Compressed air flow controllers;
• Heat pump dehumidifiers;
• White LED lighting.
It should be realised the above is just a list of the broad categories of
technology and not all systems within one of the above definitions will qualify. In order to qualify they must either be on the Product List, or be individually certified.
Further details about this are available from the enhanced capital allowances website at http://www.eca.gov.uk/
Environmentally Beneficial Plant and Machinery
The rules for this are similar to those for energy saving plant and machinery in that there is a product list and there are also broad categories of technology, all involving water efficiency or waste water recovery.
The same website provides information on the detail.
Qualifying Low Emission Cars
None of the £50,000 annual investment allowance referred to above can be used on a motor car, and normally expenditure by a business on its cars attracts writing down allowance of 20%, restricted to a maximum of £3,000 per car in any one year. Changes are proposed for 2008/09 whereby the capital allowances available on a car will depend on its CO2 emissions.
The details of these have yet to be announced, but it is likely that cars with emissions of more than 160g/km are going to be particularly severely dealt with, possibly only attracting an allowance of 10% per year.
“Qualifying low emission cars” (Qualecs) however qualify for 100% first year allowance. As from 1 April 2008 a Qualec must have CO2 emissions of no more than 110g/km or alternatively it must be electrically propelled.
In the case of bi-fuel cars the lowest of the CO2 emissions figures is used.
First Year Tax Credits
In the case of energy efficient and environmentally beneficial plant and machinery (but not Qualecs) a company making losses can choose to take its 100% first year allowances as tax credits rather than tax deductions.
The company effectively surrenders the 100% first year allowance to HMRC and is paid 19% of the allowance in cash. 19% is less than the rate at which the company might expect to get tax relief from corporation tax, but of course the benefit is that one gets the cash straight away rather than waiting until the company comes into profit.
The amount that can be surrendered in this way is limited to the greater of:
• The total of the company’s PAYE and NIC liabilities for the same period, or;
Note that these payments are only available to companies, not to individuals or partnerships.
I suppose a cynic would say that to the smaller businessman, these ECAs are largely irrelevant, because he will get 100% allowances on his first £50,000 of expenditure in any year, regardless of the nature of the plant involved.
For anyone whose expenditure is greater than £50,000, however, there is a valuable cash flow boost involved in choosing the appropriate “green” option, and even if your spend on plant is below £50,000, many of these new technologies pay for themselves in savings on energy costs.
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