What is the Enhanced Capital Allowances (ECA) scheme?
Enhanced Capital Allowances (ECA) were introduced in 2001 to encourage businesses to install energy efficient assets in buildings, including LED lighting, efficient boilers or pipework insulation.
These efficient assets attracted an accelerated rate of tax relief in the business’s tax return. And for every pound incurred the taxpayer received the benefit in full in the same tax period, with no cap on maximum spend.
If a company was in a tax loss position, the losses resulting from this efficient equipment were capable of surrender in return for a 19% (and more recently 13%) tax credit.
ECAs are operated alongside other capital allowances, meaning ECA claims don’t reduce the Annual Investment Allowance (AIA) threshold. This allows businesses to currently claim £1m of Annual Investment Allowance at 100% for each year, plus any additional uncapped tax relief under the ECA regime for ‘green technologies’.
On 29 October 2018, it was announced that the relief will end. This change will take effect from 31 March 2020 (along with the tax credit) for companies, and 5 April 2020 for unincorporated businesses.
Why is it changing?
The annual capital expenditure incurred by most businesses is below the Annual Investment Allowance threshold of £1m. That means there’s little need for the Government to operate a complex tax relief with limited benefit to only a small group of taxpayers.
On top of that, other changes such as Building Codes and Minimum Energy Efficiency Standards have led to the increased efficiency of buildings without the need for a bespoke tax relief.
What are the impacts?
While the AIA limit is £1m, it’s possible even in SME businesses to incur more than £1m of eligible expenditure in an accounting period.
How about a move to a new, purpose-built premises coupled with a new machine to increase production? That could easily exceed £1m of relief. And the balance of eligible expenditure would be relieved at a much slower rate. With ECAs there was no limit on the level of qualifying expenditure, letting businesses claim sooner rather than spreading the relief over many years.
The AIA limit of £1m is only guaranteed until 31 December 2020. After that the threshold will return to £200,000, unless the current limit is extended. The longer term result will be to remove the incentive to invest in more expensive green technologies, whilst not matching the instant relief elsewhere in the capital allowances regime.
What can you do now?
If you don’t plan to spend more than £1m per annum before 31 December 2020 and less than £200,000 after that date, you probably won’t need to change your capital expenditure plans.
However, if you plan to exceed those limits, all eligible expenditure up until 31 March 2020 will still attract ECAs. So, if you’re planning to switch over to LED lights, install a new boiler or any other qualifying energy efficient assets, you should consider making the purchase before the cut-off date.
To guarantee you’re making the most of these reliefs before they’re gone, speak to your tax adviser.