Enhanced Capital Allowances
Enhanced Capital Allowances (ECAs) are a straightforward way for a business to improve its cash flow through accelerated tax relief. The ECA scheme for energy-saving technologies encourages businesses to invest in energy-saving plant or machinery specified on the Energy Technology List (ETL) which is managed by the Carbon Trust on behalf of Government. LED lighting is on the ETL and is eligible for ECAs.
The ECA scheme provides businesses with 100% first year tax relief on their qualifying capital expenditure. The ETL specifies the energy-saving technologies that are included in the ECA scheme. The scheme allows businesses to write off the whole cost of the equipment against taxable profits in the year of purchase. This can provide a cash flow boost and an incentive to invest in energy-saving equipment which normally carries a price premium when compared to less efficient alternatives. The scheme is open to all businesses that pay UK corporation or income tax, regardless of size, sector or location. (Loss making businesses may apply against income tax payments).
Capital allowances are available for spending "on the provision of" plant and machinery. This can include certain costs arising as a direct result of the installation of qualifying plant and machinery including delivery of the equipment to the site, and some direct installation costs.
How it works
So if your business pays corporation tax at 28%, every £1,000 spent on qualifying equipment would reduce its tax bill in the year of purchase by £280. In contrast, for every £1,000 spent, the generally available capital allowance for spending on plant and machinery* would reduce your business' tax bill in the year of purchase by £56. In other words, an ECA can provide a cash flow boost of £224 for every £1,000 it spends in the year of purchase**.
* 20% a year on the reducing balance
** ECAs provide 100% tax relief, so there is no further tax relief in later years. The general rate of capital allowances does not provide 100% tax relief so there is a balance of spending to carry forward on the reducing balance basis for relief in later years.