CAPITAL ALLOWANCES - 16.02.2006

Best in class

Does what it says

Recap. Capital Allowances (CAs) enable you to write off your costs of capital assets against your taxable profits. CAs on plant and machinery are generally available at 25% a year on the reducing balance basis. 100% enhanced first-year allowances (ECAs) accelerate the tax relief by letting businesses set the whole of their expenditure on designated energy or water saving equipment against their taxable profits when the investment is made.

How do you know what qualifies? Energy and water saving assets qualifying for accelerated tax relief are listed on the government’s ECA website (http://www.eca.gov.uk). The majority are listed by specific manufacturers’ names and model types, e.g. boilers, but some are listed by functional performance criteria, e.g. lighting and pipework insulation. Manufacturers can also promote their products using an ECA Energy Technology List symbol, i.e. a certification mark.

Just ask your engineer or contractor. When new product categories are added to the list, which happens annually, it should be straightforward for your consultant services engineer, or heating, plumbing or electrical contractor to check the website and tell you if you have the opportunity to buy, or have bought, capital assets that qualify.

Best in class changes

Updates. The ECA qualifying criteria are set to ensure that the scheme supports the best energy and water saving equipment. So the list of qualifying products is updated annually (this last happened on September 22, 2005). Over several years the energy and water efficiency thresholds used will gradually move up, reflecting market improvements in products.

Problem. This means that products will stop qualifying for ECAs if they are no longer “best in class”. And with the long delays between electrical and plumbing assets being specified and installed (particularly during large construction products) this can mean that ECA products are chosen in good faith, but they do not qualify by the time they are bought and installed!

Three-month deadline

Confess. Where this happens and your business claims ECAs by mistake, then inform the Taxman within three months of discovering it and correct any error in your tax.

Tip 1. If you are thinking of buying electrical or heating and plumbing assets, ask your supplier or designer to check the ECA list to see whether you can get accelerated tax relief.

Tip 2. Before you buy an ECA product make sure it is “plant or machinery” that qualifies for CAs, so you get the added tax benefit.

Tip 3. Always check whether a particular product qualifies for ECAs again just before you buy and install it so you do not claim accelerated tax relief by mistake.

Conclusion. Although buying ECA products may be a good thing anyway, because they have low running costs, they typically cost more to buy than other products. So if you are thinking of buying an ECA product be sure you are confident it is “plant” or you will not get the added tax benefit.