Environmentally Beneficial Plant & Machinery Allowances

Summary

This briefing note provides information on how a business can claim energy efficient plant or machinery allowances. These offer the opportunity to claim first year allowances of up to 100% of the expenditure incurred, or the opportunity to surrender losses generated by the allowances in return for a tax repayment. The value of 100% first year allowances (FYA) is significantly greater now that general plant or machinery allowances have decreased from 25% writing down allowance (WDA) to 20% WDA and many categories of general plant or machinery have been reclassified as 'integral features' attracting a 10% WDA.

Entitlement to the allowance

In order to claim the 100% rate of allowance for qualifying expenditure, it is necessary to make the claim within the time limit for submitting the tax return for the accounting period in which expenditure is actually incurred. Other capital allowance provisions also apply so that there is a requirement to carry on a qualifying activity (this includes a trade, an ordinary property or overseas property business, profession or vocation, special leasing of P&M etc). Where the item is a fixture, there is a need to have a relevant interest in the building or structure, but there are circumstances, subject to election, permitting a claim where no interest is owned (e.g. Equipment lessors - CAA2001 s177 and Energy Service providers – CAA2001 s180A).

Normally expenditure incurred before a qualifying activity begins is treated as incurred on the first day that the person who incurred the expenditure carries on the qualifying activity. If a FYA is available it can be claimed on part of the qualifying expenditure, with the balance of qualifying expenditure, on which a FYA is not claimed, added to the pool for that year. Expenditure must be on plant or machinery that is unused and not second-hand. General exclusions include:

• Expenditure in a chargeable period when qualifying activity permanently discontinued;
• Expenditure regarded as a long life asset;
• Expenditure for the provision of plant or machinery for leasing (though this does not apply for (i) CO2 efficient cars, and (ii) in the case of energy or water efficient technology, the plant or machinery typically included in a building or structure that is not subject to the long funding lease rules - i.e. that which meets the definition of background plant or machinery);
• Expenditure connected with the change in nature or conduct of trade and obtaining the allowance was one of the main benefits from making the change.

Energy efficient equipment CAA2001 s45A - s45C

Details of expenditure qualifying for energy efficient first year allowances are found at: www.eca.gov.uk/etl/about/what+equipment+is+eligible.htm. The allowance is available for qualifying expenditure incurred on or after 1 April 2001. There are 11 categories of listed qualifying equipment:

• Air-to-air energy recovery
• Automatic monitoring and targeting (AMT)
• Boiler equipment
• Compact heat exchangers (this category is removed from the list with effect from a date to be announced by Treasury order)
• Compressed air equipment
• Heat pumps for space heating
• Heating ventilation and air conditioning zone controls
• Motors and drives (this category will include permanent magnet synchronous motors with effect from the date specified in the 2010 amending Treasury order)
• Refrigeration equipment
• Solar thermal systems
• Warm air and radiant heaters (this category will include biomass fired warm air heaters, with effect from the date specified in the 2010 amending Treasury order)

Liquid pressure amplification technology will be removed from the list with effect from the date specified in the 2010 amending Treasury order.

In addition to the cost of a particular item of equipment any claim can also include associated transportation, installation and other directly associated professional costs. The Enhanced Capital Allowance (ECA) list is updated from time to time and some equipment may be removed from the list of qualifying equipment. It is only possible to make a claim if the item is on the list at the date the expenditure is incurred. There are four other categories for which specific products are not listed:

• Component Based AMT
• Combined heat and power (CHP)
• Pipework insulation
• Lighting Certification from the Department of Energy & Climate Change (DECC) is required for Component Based AMT and CHP equipment.

Certificates for CHP equipment must be renewed every year. Application for initial and on-going CHP quality assurance certificates is administered by CHPQA – a division of DECC (see www.chpqa.com/html/certificates.htm. Certification for AMT equipment can be obtained by submitting a Certificate Request form to the Energy Technology List (ETL) product administrator at ECAQuestions@carbontrust.co.uk . As there are many varieties of pipework insulation and lighting which qualify, there is no comprehensive list, though qualifying status should be available from the manufacturer. For these two categories the ECA website includes a list of those manufacturers who have completed the relevant forms in respect of their products.

Finance Act 2009 announced a new category of technology (Uninterruptible power supplies) is to be introduced in 2009 by Statutory Instrument.

CO2 efficient cars CAA2001 s45D

Expenditure incurred on cars which are either electrically propelled, or have low CO2 emissions (the level is currently set at an amount not exceeding 110g/km and before 6 April 2008 was 120gms/km) meets the condition for FYA if incurred within the period beginning 17 April 2002 and ending 31 March 2013.

Natural Gas & Hydrogen refuelling equipment CAA2001 s45E

FYAs can be claimed for expenditure incurred on qualifying equipment for a gas refuelling station solely in connection with refuelling vehicles with natural gas, biogas or hydrogen fuel, during periods beginning with 17 April 2002 and ending with 31 March 2013. Qualifying equipment includes:

• Any storage tank for natural gas, biogas or hydrogen fuel;
• Any compressor, pump, control or meter used in connection with refuelling vehicles using such fuels;
• Equipment for dispensing such fuels to the fuel tank of a vehicle.

Water efficient technology CAA2001 s45H - s45J

The Government currently supports the following categories of technologies within the ECA scheme for water related equipment that qualify for first year allowances:

• Cleaning in place equipment
• Efficient showers (with stricter criteria from a date to be announced in the 2010 amending Treasury order)
• Efficient taps (with stricter criteria from a date to be announced in the 2010 amending Treasury order)
• Efficient toilets
• Efficient washing machines
• Flow controllers
• Leakage detection equipment
• Meters and monitoring equipment
• Rainwater harvesting equipment
• Small scale slurry and sludge dewatering equipment
• Vehicle wash water reclaim units
• Water efficient industrial cleaning equipment
• Water management equipment for mechanical seals

The detailed list of those items which qualify is found at: http://www.eca-water.gov.uk/. Applications can be made for the inclusion of other equipment on the list of items qualifying for the allowance. Amongst other conditions, the equipment must make a significant water savings or significantly contribute to water quality enhancement. This allowance is available for expenditure incurred on or after 1 April 2003, and only for expenditure included on the list of qualifying technologies on the date it is incurred.

Finance Act 2009 announced the proposed addition of two new sub technologies, namely: Air to water heat pumps and Close control air conditioning systems. Also announced was the intended withdrawal of three subtechnologies: Single duct and packaged double duct heat pumps; Ground source brine to air heat pumps and; Water source packaged heat pumps.

Claiming a Tax Credit Repayment in respect of s45A or s45H expenditure

The new payable ECA credits (CAA2001 Sch A1) permits the part of a company loss generated by expenditure on ECA qualifying equipment to be surrendered in return for a repayment of tax calculated at 19% of the loss surrendered. The tax repayment cannot exceed the larger of: (i) the company's PAYE and NIC liabilities for payment periods ending in the chargeable period, and (ii) £250,000.

A loss can only be surrendered if other forms of loss relief are unavailable (such as relief against other or earlier profits, group or consortium relief). A loss can only be used once and a company may choose how much of the loss to surrender. The rate at which the tax repayment is calculated is 19% of the loss surrendered (this compares favourably with 14% for R&D tax credit and 16% for Land Remediation (LRR) tax credit with effect from 1 April 2008). Thus the maximum loss that can be surrendered for a payment under the ECA loss facility is £1,315,789 per annum, regardless of the company's PAYE/NIC liabilities, or more if the PAYE/NIC liabilities are greater than £250,000. It will not be possible to use the same loss to claim for tax credit repayment under the ECA, R&D and LRR facilities.

Adjustments to the payment may occur in subsequent periods (e.g. where an ECA certificate is revoked, where an amended claim is submitted, or where ECA qualifying equipment is sold within 4 years of the end of the chargeable period in which the original claim is made). Where the adjustment or sale within the 4 year period reduces the amount of payable ECA the associated loss will be reinstated. Conversely where there is no adjustment or clawback (e.g. the certificate has not been revoked, and disposal occurs outside the 4 year clawback period), there is no clawback of tax credit payment or reinstatement of loss.

Please Note

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice.

You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.