Enhanced Capital Allowances

25 February 2020

The 2018 budget announced the elimination of Enhanced Capital Allowances (“ECAs”) for expenditure on energy and water efficient plant and machinery from 1 April 2020 for companies and 6 April 2020 for unincorporated businesses.  This date is fast approaching and it is important that anyone who is considering investing in ‘energy-saving’ or ‘environmentally friendly plant machinery’ consider if the purchase can be made prior these dates to enable them to benefit from the attractive cash flow opportunities that still exist.  

For example, if a company incurs £100,000 of qualifying ECA expenditure this would reduce the corporate tax bill in the year of expenditure by £19,000 (based on current tax rates). In comparison, if the enhanced rate is not available and the asset was allocated to the special rate pool, the reduction in the company’s tax bill in the year of expenditure would typically only be £1,140.  

To qualify for ECA’s, assets purchased must be included on either the Energy Technology Product List or the Water Technology List. Such assets attract 100% tax relief in the year of expenditure and can be claimed in addition to the current AIA limit of £1,000,000.   

Companies in a loss-making position can also benefit from the ECA scheme by surrendering losses that are directly attributable to ECAs for a cash payment from HMRC. With the claim made at 2/3rd’s of the tax rate for a year, if a company surrendered a loss of £100,000 for the year ended 31 March 2019, they would receive a cash payment of £12,667 from HMRC (19% x 2/3 = 12.67%). The maximum payment that can be claimed is limited by the company’s total PAYE and National Insurance payments for the year in which the claim is made or, if greater, £250,000.  This relief is not available to unincorporated businesses. 

If a business wants to benefit from this tax relief, they should take action now to ensure the ECA expenditure is incurred before the cessation date.  If you would like to discuss this further, please contact Lesley Connon, Corporate Tax Senior Manager (lesley.connon@aab.uk) or your usual AAB contact. 

By Lesley Connon, Corporate Tax Senior Manager.

To find out more about Lesley and the Corporate Tax team, click here. 

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