What are Enhanced Capital Allowances (ECA)?
The Enhanced Capital Allowance (ECA) schemes are a key part of the Government’s programme to manage climate change and are designed to encourage businesses to invest in energy-saving and water-efficient equipment.
The Energy Saving ECA schemes allow businesses of all sizes investing in designated technologies that reduce energy consumption to write off 100 percent of the cost against the taxable profits of the period during which the investment was made.
It is important to note that the budget in October 2018 introduced measures to end the 100% first-year allowance for Enhanced Capital Allowances in April 2020. However, in the March 2020 budget, it was announced that designated assisted areas of Enterprise Zones will remain available for a year longer than planned on expenditure incurred until at least 31 March 2021.
The key features of the two schemes are highlighted below.
The key features of the two schemes
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Energy Saving Equipment Scheme
Enhanced Capital Allowances (ECAs) can only be claimed on energy-saving products that meet the relevant criteria for their particular technology group, as detailed on the Energy Technology Criteria List (ETCL). The list of qualifying products within each technology is updated each month to include any new or modified products that meet the criteria.
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Financing your equipment
Through the ‘Carbon Trust’, a government-backed scheme, there are interest-free loans available to purchase energy-saving equipment. This is applicable to all small and medium-sized enterprises trading for at least 12 months. The loans available range from £3,000 – £100,000.
Which technologies and products qualify for ECAs?
- Boiler equipment
- Heating ventilation and air con equipment
- Lighting
- Refrigeration equipment
- Radiant and warm air heaters
- Pipework insulation
- Automatic monitoring and targeting (AMT)
- Air vent systems
- …and more
How can a company benefit from an ECA?
Where a Company is in a loss-making position, they may be able to surrender their ECA’s in exchange for a cash payment from the Government. This is particularly beneficial where the company’s tax losses cannot be relieved for a number of years because they have insufficient profits to absorb the losses.
The first-year Tax Credit will be in the form of 19% of the surrenderable loss, but the amount of the payable credit cannot be more than the greater of the Company’s total PAYE and NIC liabilities for periods ending in the chargeable period and £250,000.
A Company may claim a payable first-year Tax Credit for a chargeable period if:
- It incurs relevant first-year expenditure for a qualifying activity and has received a First Year Allowance (FYA) in respect of that expenditure.
- it makes a loss in carrying on the qualifying activity and that loss, or part of that loss, is surrenderable,
- it is within the charge to Corporation Tax on the profits from that qualifying activity,
- it is not an excluded Company in that chargeable period.
Companies may surrender all or part of its surrenderable loss. Once a loss has been surrendered for a Tax Credit payment it is not available for relief in any other way. Any losses carried forward to future accounting periods are reduced by the amount of loss surrendered for a first-year tax credit. A Tax Credit is not treated as taxable income.
