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Enhanced tax deductions for green equipment

Is it green?

It’s the job of the Carbon Trust (CT) to manage the list of green equipment on which businesses can claim tax breaks. At first sight it doesn’t look inspiring, but we think it’s worth closer inspection. Apart from low CO₂ emissions machines there are many other diverse types of equipment which qualify, such as screens for refrigerated cabinets, solar collection systems to heat water, and the latest addition announced in this year’s Budget: washroom hand dryers (see The next step). But the million dollar question is, how much tax can these actually save you?

It’s all about timing

If you buy equipment which is on the CT list, you can claim a tax deduction for the full cost in the financial year in which you make the purchase. This is called an enhanced capital allowance (ECA). But if the equipment is not on the list, you’ll receive tax relief through the normal capital allowances (CAs) system. This means that while you’ll eventually receive a full tax deduction, it can take over 20 years. So this tax break results in faster tax relief, not more. But this can still provide financial gain for your company.

Example. In the year to March 31 2012 Acom Ltd spends £50,000 updating equipment in its factory. It borrows from the bank to do this and pays interest at 10% APR on the debt. It claims ECAs on the purchases and receives a Corporation Tax (CT) deduction for the cost which reduces its tax bill for 2011/12 by £10,000 (£50,000 x 20% CT). The tax saving is immediately used to reduce the bank debt. If the equipment had not qualified for ECAs, Acom would have less money from tax relief to pay the debt; after ten years it would amount to just £5,650 (see The next step). The interest Acom saves by claiming ECAs is around £1,800.

The AIA factor

You can turn ECAs into a cash advantage by using the money to pay off debts or perhaps to invest. But you actually don’t need to buy CT approved equipment to receive the same tax advantages. The existing CA rules allow you to claim a full tax deduction in exactly the same way as ECAs as long as your total expenditure on equipment doesn’t exceed the annual limit, currently £100,000. This is called the annual investment allowance (AIA).

Trap. The current AIA is high enough to ensure that most companies can make purchases of equipment without having to worry about whether it qualifies for ECAs. But from April 2012 the AIA is being slashed to just £25,000.

Tip 1. If you’re planning to buy equipment in the next couple of years, take into account the lower AIA which applies from April next year. To get immediate tax deductions where the cost of the equipment exceeds the AIA, consider buying equipment that qualifies for ECAs.

Tip 2. There’s a dedicated website for ECAs which includes a database of manufacturers/sellers and their products which are on the CT list. We found that identifying a specific item can be tricky, but most businesses on the database will be happy to tell you whether their products qualify.

For a link to the CT website (TX 11.17.06A) and the ECA website (TX 11.17.06B) and for the full calculations in the example (TX 11.17.06C), visit http://tax.indicator.co.uk.