Why Enhanced Capital Allowance could save you thousands

May 17, 2017

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Enhance capital Allowance (ECA) is a UK government scheme to encourage investment in energy-efficient products to reduce carbon emissions.

For a government scheme, this fund is underutilised. In this blog, we’ll walk you through what it is and how to get it.

How the fund works

  • ECAs are claimed through the tax returns between the period of which the expenditure is incurred.

 

  • The ECA scheme allows businesses to write off the whole cost of the equipment against taxable profits in the year of purchase. The first-year allowances let businesses set 100% of the cost of the assets against taxable profits in a single tax year, which are available for certain environmentally beneficial technologies which qualify for enhanced capital allowances (ECAs).

 

  • Example: Spending £10,000 on assets that qualify for ECAs would give a tax relief worth £2,100 in year one (at a 21% corporation tax rate) whereas spending the same on assets that do not qualify would give a tax relief worth only £340 in year one.

 

How to claim it

Claiming is quite simple once you know what to claim, understanding what’s eligible and the requirements of the Capital employed.

 

What to claim

Businesses claim for ‘plant and machinery’ with this fund (capital items that businesses utilise in their operations). Businesses can claim an ECA on everything from the cost of qualifying equipment, transportation of the equipment to the site and direct installation cost of equipment.

 

What’s eligible

Eligibility ranges from the plant and machinery being unused to the expenditure occurring after 1 April 2001. Besides that, here a condensed list of items typically eligible:

  • Lighting.
  • Automatic monitoring and targeting (AMT) equipment.
  • Combined heat and power (CHP).
  • Heating, ventilation and air conditioning (HVAC) equipment.
  • High-speed hand air dryers.

And much more!

 

Requirements

The business claiming must be a UK company subject to corporation tax (i.e. excludes unincorporated businesses and partnerships of companies).

Particular eligible activities which are excluded from the fund, the full comprehensive list, can be found on the website.

 

Benefits to using or installing ECA-registered technology/equipment:

Businesses are often tempted to opt for equipment with the lowest purchase cost. Such immediate cost savings often prove to be costly long-term. ECA Tech is the high initial cost equipment that can offer significant ongoing savings and reduce payback periods.

Tax relief can be claimed on the purchase and installation costs of specific types of LED lighting and lighting controls, proving cost-effective advantage and saving for companies using lighting equipment.

In addition, adoption of ECA qualifying items may also improve a project’s Building Research Establishment Environmental Assessment Method (BREEAM) ratings and contribute towards achieving an improved Energy Performance Certification rating.

 

Those who plan to act better act fast

Too many taxpayers fail to consider the ECA opportunities early enough, if at all. They often assume their professional advisors (design team, surveyors, contractors, accountants) have “considered all the options”, but it is not always the case and it isn’t always done comprehensively.

When ECAs are considered early in the design stages of a project, there is more opportunity to correctly identify and install products which qualify for ECA and so fully optimising the capital allowances, boosting cash flow.

 

Can the ECA work in conjunction with other types of Allowance?

Yes.

How you claim and the time limits depend on the status of the business i.e. whether it is constituted a self-employed/sole trader, partnership or company.

Qualifying for multiple funds can open the opportunity to gain a partial claim to ECA with the potential to carry the balance through to the following year if it is not needed for the initial capital expenditure.

 

Has anyone ever done it?

Sure! Have a look.

 

 

 

 

References:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/421006/ECA272_Capital_Allowance_v7_April_2015.pdf

https://www.bdo.co.uk/en-gb/services/tax/capital-allowances/enterprise-zones

https://www.gov.uk/capital-allowances/how-to-claim

https://www.out-law.com/topics/tax/property-tax-/enhanced-capital-allowances/

http://www.e3consulting.co.uk/?PageID=184

http://www.gscgrays.co.uk/2014/08/13/capital-allowances-opportunity-always-exploited/

 

 

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