Worcester Renewables Ltd

t:01386-871490 e:info@WorcesterRenewables.com

Tag: Enhanced Capital Allowances

Government Announces Blow to Business on Enhanced Capital Allowances (ECA)

Some of our commercial clients have expressed confusion as to what capital allowances can be claimed for solar photovoltaic panels.

They had hoped, quite naturally, that they could claim the equipment under the enhanced capital allowances, allowing them to offset the whole cost of the installation against profits in year 1.

Unfortunately, in an email we received yesterday, the Government confirmed that solar pv systems do not currently qualify for enhanced capital allowances (ECA) – the reason given – it is not seen as an energy saving equipment, as it is a generating device.

However it’s not all doom and gloom – so long as you mover quickly!

As a business, you may still be able to claim 100% of the cost in Year 1 however.

The confusion arises because in addition to technologies that qualify for the ECA, a business has an annual limit that it can claim on the Annual Investment Allowance (AIA) for all forms of equipment.

So if your business still has a portion of this limit left, it will still be able to offset some or all of the expenditure at 100%.

For this year (depending upon your year end) ending April 2011, the annual limit is £100,000 of capital machinery and equipment in each year.

As of April 2011, this drops to only £25,000, (the Government has to recoup some of the reduced Corporation tax!) so for businesses who are contemplating photovoltaics, it makes sense to purchase now rather than wait for even a couple of months.)

So, Solar PV is to be treated like any other capital investment

However it is not all doom and gloom even then!

In future you will first have a capital allowance of £25,000 and then, as a business  you can claim can claim 20% of the value in year 1 and then 20% of the declining balance in subsequent years.

For example suppose a business which next year purchases Solar PV of say £100,000, (and has no other capital investment to offset) you can claim:

Year 1 £25,000 + £15,000 (20% of £75,000)
Year 2 £1,800 (18% of 60,000)

and so on, one point to watch though – that 20% is about to be reduced to 18% meaning that instead of being able to right off over about 8 years, it will now take 10 years

In detail

Companies may claim allowances on their qualifying plant and machinery expenditure.

One important element is a reduction in the 100% Annual Investment Allowance from £100,000 to £25,000 from 1 April 2012 although the Chancellor noted that 95% of all businesses will still obtain 100% relief for their qualifying expenditure.

Most qualifying expenditure will fall into the general pool on which the current rate of allowance is 20% calculated on a reducing balance basis. This rate will reduce to 18% for chargeable periods ending on or after 1 April 2012. Certain qualifying expenditure is required to be included in the special rate pool, including for example integral features, high emission cars and long life assets. The current rate of allowance for this class of asset is 10% calculated on a reducing balance basis. This rate is to reduce to 8% for chargeable periods ending on or after1 April 2012.

Where a chargeable period spans the change of rates on 1 April a hybrid rate will apply. For example, for a chargeable period to 31 December 2012 hybrid rates of 18.49% (91/366 x 20% + 275/366 x 18%) and 8.5% (91/366 x 10% + 275/366 x 8%) would apply.

The special rates of capital allowances for the oil and gas industry will continue to apply.

The Annual Investment Allowance is a 100% allowance available to companies, currently on the first £100,000 of their qualifying expenditure on plant and machinery. Certain capital expenditure, including in particular expenditure on company cars, is excluded from this allowance. The annual allowance is to reduce to £25,000 from April 2012. Rules to cover transitional periods are due to be published nearer to the date of change.

Many thanks to our friends James Geary and Will Silsby over at Rabjohns for helping to explain this  – you can find them here: Rabjohns.co.uk

Enhanced Capital Allowances and Solar PV (Photovoltaic) Panels

What is the ECA scheme?

The Enhanced Capital Allowance (ECA) scheme is a key part of the Government’s programme to manage climate change, and is designed to encourage businesses to invest in energy-saving equipment.

Why was it introduced?
The Government introduced the ECA scheme in 2001 to encourage businesses to invest in low carbon, energy-saving equipment. As part of the Climate Change Levy Programme, it’s designed to help the UK reach its Kyoto target of reducing carbon emissions by 20%.

There are three ECA schemes which provide enhanced tax relief for spending on equipment which has environmental benefits: energy-saving equipment, water-efficient equipment and low carbon dioxide emission cars. Here we will only deal with the energy saving equipment.

Which technologies and products qualify for ECAs?

An up-to-date list of the technologies that qualify for the allowance can be found on the Energy Technology Product List (ETPL). The groups currently on it are:

  • Air-to-air energy recovery
  • Automatic monitoring and targeting (AMT)
  • Boiler equipment
  • Combined heat and power (CHP)
  • Compressed air equipment
  • Heat pumps for space heating
  • Heating ventilation and air conditioning equipment 
  • Lighting
  • Motors and drives
  • Pipework insulation
  • Radiant and Warm Air Heaters
  • Refrigeration equipment
  • Solar thermal systems
  • Uninterruptible Power Supplies (UPS)

The Energy Technology List (ETL) is solely for the purposes of identifying those energy efficient products which are eligible for an enhanced capital allowance.

Why are Solar Photovoltaics (PV) not included on the ETL?

These are energy generating technologies rather than energy saving and are therefore outside the remit of the ECA Scheme.

For more details:
ECA Frequently asked questions

ECA What equipment is eligible