Maximising the Benefits of Capital Allowances
Budget 2017 extends the time limits of capital allowances for certain purchases
Last Autumn’s Budget contained a number of headline measures – including more tax on diesel cars and a freeze on fuel duty, for example – that affected UK firms. However, there were a number of energy efficient capital allowances that flew below the radar and which were of interest to certain businesses, especially those looking for tax relief on environmentally friendly or corporate social responsibility projects. Here we explain just a few of the capital allowances that your business could benefit from.
Three year extension to capital allowance rates for zero emission goods vehicles and gas refuelling equipment.
The Autumn Budget Statement revealed that, from this April, businesses purchasing zero emission goods vehicles or gas refuelling equipment for use in their business would see their eligibility for 100% First Year Allowances (FYA) extended for a further three years.
This is designed to support the transition to cleaner zero and ultra-low emission vehicles, to help improve air quality in towns and cities and “protect the environment for the next generation”.
The gas refuelling equipment required to refuel natural gas, biogas and hydrogen powered vehicles is also included in the scheme. Their capital allowances eligibility has been extended from the original date of April this year until March 2021.
The Treasury stated that the measures were expected to benefit approximately 100 businesses each year. These will be able to claim first year allowances up until 31 March 2021 for Corporation Tax or April 5 for Income Tax.
Businesses may, however, already be submitting claims for this investment under the Annual Investment Allowance (AIA) if the threshold, which has been £200,000 since January 2016, is not exceeded. The allowance for zero-emission goods vehicles is only available to businesses that have not already received any plug-in grants.
Changes to the enhanced capital allowances list eligible for 100% First Year Allowance (FYA)
On a similar environmentally-friendly theme, businesses purchasing designated plant and machinery which use energy efficiently are eligible for 100% FYA. Last Autumn’s Budget made a number of changes including adding three new products, modifying nine and removing two items from the list of qualifying assets for enhanced capital allowances.
The enhanced capital allowance scheme allows businesses to write off 100% of the cost of an investment in qualifying plant and machinery against the taxable income for the period in which the investment is made, thereby improving cash flow.
It aims to reduce business’s energy consumption by encouraging their investment in more efficient plant and machinery. This can help reduce overall energy costs and carbon emissions, said the Treasury.
Once businesses have fully used their £200,000 annual investment allowance (AIA), plant and machinery allowances are available at 18% main rate and 8% special rate.
However, this scheme provides an alternative 100% first-year allowance for expenditure on certain energy-saving technologies (EST) which is particularly beneficial for those businesses that have fully used their AIA.
Energy savings products included on the enhanced capital allowances list:
- Air to air energy recovery
- Automatic monitoring and targeting (AMT) equipment
- Boiler equipment
- Combined heat and power (CHP)
- Compressed air equipment
- Heat pumps
- Heating, ventilation and air conditioning (HVAC) equipment
- Warm air and radiant heaters
- Waste heat to electricity conversion equipment
Full details on the enhanced capital allowance scheme can be found here: https://etl.beis.gov.uk/engetl/fox/live/ETL_PUBLIC_PRODUCT_SEARCH
The Treasury estimates that for 99% of businesses there will be no impact because the majority of the expenditure they incur on plant and machinery will be eligible for full relief under the £200,000 threshold AIA.
For those businesses that have fully used their AIA, the new list came into effect soon after the Budget. The Government hopes that, by incentivising investment in energy and water efficient technologies, this should reduce carbon emissions and encourage sustainable use of water resources.
Extension to the scheme of First Year Tax Credits for qualifying energy and water technology
The scheme of first year tax credits (FYTC) allows loss-making businesses which purchase plant and machinery that uses water or energy efficiently to qualify for tax credits on eligible purchases.
This scheme was due to expire in March this year but the Budget extended the deadline for a further five years until 2023.
The aim of these energy efficient capital allowances aim is to overcome the barrier of high purchase costs where the energy or water efficiency of a product can provide savings to businesses and provide wider environmental benefits. An example is a reduction in overall energy costs and carbon emissions, thereby helping the UK meet its carbon reduction obligations.
Loss-making companies can claim a percentage of the FYA on qualifying purchases in cash, known as a first year tax credit, up to a certain percentage of the prevailing Corporation Tax rate.
Changes to the First Year Tax Credits scheme come into force from this April and set the amount that businesses can claim at two-thirds of the Corporation tax rate – which is currently 19%.
The energy or water-efficient products that are eligible under the scheme are decided by the Department for Businesses Energy and Industrial Strategy (BEIS) and the Department for Environment, Food and Rural and Affairs (Defra) following a review every year.
Qualifying for Capital Allowances
When a business buys plant, machinery and IT equipment, it can deduct a proportion of the cost from taxable profits each year in the form of plant and machinery capital allowances.
However, the business can only claim capital allowances if the equipment is:
- bought outright
- bought through hire purchase
- supplied under a long funding lease, typically of more than seven years in length.
The business can’t claim capital allowances for shorter leases but the supplying leasing company can, so that the business should benefit indirectly from capital allowances on leased assets through lower rental charges. Also, because it is recognised as a trading expense, the business can usually deduct the full rental costs from its taxable income.
Want to find out more about the capital allowances available for your business? Get in touch with Anglo Scottish Asset Finance today