What is a Capital Allowance?
Currently businesses may obtain tax relief, in the form of capital allowances,
for their investment in machinery and plant.
Companies pay 30% corporation tax on the profits they make (SMEs pay 40% in the first year followed by 25% a year)
The normal capital allowance rate is 25% a year on the reducing balance basis which spreads the benefit over a number of years (about 95% of the cost is relieved in 8 years).
With the Enhanced Capital Allowance companies can reduce the taxable amount by 100% in the first year.
EXAMPLE
Company A has profits of £100,000, and spends £10,000 capital on a new heating system.
With a standard capital allowance they can reduce the taxable amount by 25%
of £10,000 in the first year (£2,500), meaning they pay tax on
£97,500 (@ 30% = £29,250) in the first year. GIVING A TAX SAVING
OF £750. This continues year by year at 25%. of the outstanding balance.
With an ENHANCED CAPITAL ALLOWANCE the company can reduce the taxable
amount by 100% in the first year, meaning they will pay tax on £90,000
(@ 30% = £27,000) instead of tax on £97,500 (@30% = £29,250)
in the first year. GIVING A TAX SAVING OF £2250 – much greater
than with the standard capital allowance
Enhanced capital allowances bring forward tax relief, resulting in significant
cash flow benefits .
Only those products listed on the Energy Technology Product List (ETPL) are
eligible for the Enhanced Capital Allowance Scheme. For an up to date listing
visit the ECA website.
What else is included ?
Cost of qualifying plant and machinery,Installation costs, Professional fees (consultancy fees), Costs of altering an existing building
What is NOT Included
Investments in maintenance or replacement heating systems that are not classed as capital spending (and therefore already attract the 100% first year tax write off)
Public sector bodies are excluded because they do not pay income/corporation tax
Further information is available on the official ECA web site, operated by
the Carbon Trust. Go to www.eca.gov.uk