A Guide to Enhanced Capital Allowances (ECAs)

 

What are they and what are the benefits?

One of the incentives being offered by the Government to promote energy efficient technology is the Enhanced Capital Allowance (ECA). This enables companies to claim Corporation Tax relief on 100% of the total cost of an approved energy efficiency technology in the first year after installing it. Standard tax relief on eligible assets is normally given at 25% of the cost on a reducing balance basis and it takes 8 years to claim 90% of the total. The advantage of the ECA is that it accelerates the cash flow from tax relief on energy efficiency assets as shown in the example below.

ABC Food Ltd makes £500,000 profit per year and pays corporation tax at 30%. In 2001 the company invests £100,000 on energy efficiency equipment eligible for an ECA.

 

Year

Capital Spend (£)

Standard Allowance

Enhanced Capital Allowance

Eligible for Tax Relief (£)

Tax Saving (£)

Eligible for Tax Relief (£)

Tax Saving (£)

2001

100,000

25,000

7,500

100,000

30,000

2002

18,750

5,625

2003

14,063

4,219

2004

10,547

3,164

2005

7,910

2,373

2006

5,933

1,780

Etc.

Etc.

In the above example although the total amount of each claim will ultimately be the same, with an Enhanced Capital Allowance £22,500 extra cash is available to the business in 2002. ECAs can therefore bring significant economic advantage to a business and depending on your cost of capital, the ECA is worth between 5% and 10% of the capital cost.

How do I claim them?

The tax relief is claimed though the completion of the company tax return along with other capital allowances. This is a self assessment process and therefore is claimed through your company accounts function. The equipment can be bought at any time, you simply need to ensure that all or part of your investment is eligible at the time of purchase.

What technology is eligible?

All the equipment that is eligible for an enhanced allowance is held on the “Energy Technology Product List” which can be found on the enhanced capital allowance web site www.eca.gov.uk. It is a long comprehensive list and being constantly updated as manufacturers seek to have their equipment registered. Some of the eligible technology categories are:

combined heat and power boiler systems

motors

variable speed drives

lighting systems refrigeration equipment pipe insulation

thermal screens

 

When a company installs approved equipment that is listed on the “Energy Technology Product List” the eligible costs for an ECA consist of the actual purchase cost of the equipment, transportation and installation costs, alterations to an existing building and professional fees directly associated with the installation of the equipment.

When an eligible technology is supplied as an integral part of a larger plant or system the value of the eligible technology will attract an ECA and the remaining value of the plant will attract a capital allowance at the standard rate. Standard values have been determined for approved equipment for this purpose and can be found on the ECA web site.

The ECA applies only to new equipment and cannot be applied to existing or 2nd hand technology.

What should you do next?

Visit the websites listed below, particularly the ECA site and identify the eligible technologies that are appropriate to your business.

Make sure all those who are involved in making and executing capital plans are aware of the scheme and the eligible equipment.

Review capital expenditure plans to see when eligible equipment is being installed, making sure full advantage is being taken of ECAs.

Revisit marginal capital projects involving eligible equipment as they may now be more attractive investments.

Summary

 

  • The Enhanced Capital Allowance scheme allows 100% depreciation of the direct purchase and installation costs of new energy efficiency technology to be claimed in the first year making ALL the tax relief available to the business in the same year the technology is installed. Depending on your cost of capital it is typically worth between 5% and 10% of the capital cost.
  • Not all technology is eligible. Some eligible categories are listed on the previous page and each individual product must be on the “Energy Technology Product List” to qualify. The web site www.eca.gov.uk contains the up to date list of approved products.
  • The eligible costs for approved products also include the transport, building modification and consultancy costs associated directly with its installation.
  • Where a large plant contains eligible products an ECA can be claimed for the eligible element only. In these cases the standard eligible cost can be obtained on the ECA web site.Further Information The Enhanced Capital Allowance Scheme web site www.eca.gov.uk

    A small easy to navigate site. Essential reading containing the list of approved products.The H M Revenue & Customs website www.hmrc.gov.uk

    A large website, go to the index and look up capital allowance and energy-saving investments.

     

    The Carbon Trust website www.carbontrust.co.uk

    A large site with a considerable amount of sector specific energy advice. Helpline 0800 085 2005.

 

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