At this festive time of year I thought I would remind you about another form of tax relief that is on offer from HM Revenue & Customs. This comes in the form of an enhanced capital allowance and is particularly relevant if you are thinking of purchasing, say, a new Combined Heat and Power system to keep your employees warm and also power your fairy lights!
By way of background Capital Allowances (CA) are a little known, but highly valuable property-related tax relief which can result in significant tax savings for commercial property owners and many leaseholders on items bought for use within the business. It is deductible tax relief available when a taxpayer incurs capital expenditure on qualifying assets within a commercial property typically when constructing or refurbishing a building. CA’s are the tax equivalent of accounting depreciation and reduce the taxable profits, thereby lowering your tax liability.
In property you will find two categories of qualifying assets:
Integral Features (known as “special rate pool” items) qualify for an 8% allowance on a reducing balance basis allowance this includes electrical systems, cold water systems, heating, ventilation & air-conditioning, lifts, external solar shading and thermal insulation in existing buildings
General plant (known as “main pool” items) qualify for an 18% allowance on a reducing balance basis typically including items such as sanitary fittings, kitchens, carpets, signage, security systems, racking, Christmas decorations, furniture and fittings
The government introduced Enhanced Capital Allowances (ECA) in 2001 to encourage expenditure on greener technologies to help manage climate change. There are two government approved lists scheduling what energy and water products qualify for ECAs. To qualify the asset acquired must be new and unused and on the list at the date of acquisition you are then entitled to a 100% allowance of the cost of the asset (or claim value where applicable) in the year of acquisition. This is deducted from your taxable profits, resulting in a lower tax charge or in some cases a cash rebate.
To illustrate let’s say if a business invests £10,000 on a new air conditioning system. This is an integral feature therefore will obtain an 8% deduction as a capital allowances and the cash saving in year one will be £360 at the 20% corporation tax rate. The remaining £1,640 of tax relief will be deducted over the next 55 years.
If instead the business had installed an air conditioning system that was listed on the Energy Technology List (ETL) at the date of acquisition the cash saving would have been £2,000 in the year of acquisition.
Indeed our clients who invest in ECA qualifying technologies have commented on the longer term benefits of installing green technology such as lower energy bills, reduction in Climate Change Levy, CRC payments and also an improved BREEAM status.
Please note that there are four non- listed technologies including lighting, automatic monitoring and targeting equipment (AMT), combined heat and power (CHP) and pipe work insulation. For these technologies your supplier will be able to advise whether their product qualifies for ECAs and certification will be required to support your claim. This certification varies from a statement from the supplier (lighting) to an official form (CHP).
An additional relief through ECAs is available to limited companies. If you have incurred expenditure on ECA compliant assets and have a tax loss in the year you can surrender the ECAs claimed for a tax repayment at a rate of 19%, a real Christmas treat! This claim can be made up to two years after the end of your accounting period.
ECAs offer taxpayers a great opportunity to accelerate relief on your capital expenditure and reduce your tax bill especially if this is incorporated into the decision making before a project commences you can achieve significant tax saving. Unfortunately this is an area that is frequently overlooked and not considered until it is too late to influence the outcome which means businesses are unable to make a valid claim for these up-front tax breaks. Let us help you!
Please come back tomorrow for another Christmas tax break.