The Enhanced Capital Allowance Scheme

What is the ECA?

The Enhanced Capital Allowance (ECA) allows businesses to claim capital allowances on investments on equipment that is energy saving or more energy efficient than existing equipment, against the taxable profits of the period of investment.
The scheme generates financial savings for a business but also makes the business more sustainable and energy efficient reducing its impact on the environment. The reason this scheme is in place is to help meet energy and co2 targets by 2020.

Benefits

– Provides Tax Relief up to 100% of investment
– Businesses paying corporation tax at 28% can expect a return of 28p for each pound invested.
– The product needs to be on The Energy Technology List (ETPL) to gain the full ECA.
– Products not on the ETPL will only receive up to 20% tax relief.
– Financial benefit can be greater for a company or individual investor depending on how much corporation tax they pay and if they pay income tax
– Reduces payback period
– Generates cash flow
– Reduced energy costs over time
– Not only having the new ECA as a benefit, investing in Solar thermal and other energy saving products will reduce a company’s energy bills, as operational costs are reduced. This will also reduce a company’s Climate Change Levy, creating savings year upon year. 

 Saving energy to a higher level
– Capital allowances enable businesses to write off the capital cost of purchasing plant and machinery, for example equipment such as Solar thermal, against their taxable profits. They take the place of depreciation charged in commercial accounts.
– General Rate without being on ETPL is a 20% allowance.
– New energy product = £1000
– 20%General rate of new energy product £1000 = £200 capital allowance
– Capital allowance is then claimed against taxable profits of the period of investment
– If, however, business invested the same amount in high efficiency Solar panels from the ETPL, it could claim a 100% first-year capital allowance of £1,000 against the taxable profits of the year of investment.
– Company pays corporation tax at 28%
– New energy product = £1000
– 28% of £1000 = £280
– So the allowance would reduce the tax bill by £280 creating an advantage in cash flow for that year.
– The 100% first-year capital allowance relieves all the qualifying spending. Therefore there is no unrelieved spending to carry forward against profits of later years.
– If a company makes £2000 profit they can write off £1000 of expenditure and only pay tax on £1000 of profit.