CIBSE Briefing The Enhanced Capital Allowance Scheme for energy saving plant and machinery An cash incentive for your clients to invest in energy and tax efficiency What are Capital Allowances? Capital allowances allow the costs of capital assets within buildings to be written off against a business s taxable profits. On some projects over half the expenditure will attract allowances and are therefore of considerable value. The most commonly available allowances relate to a buildings integral features and general plant and machinery. Property owners and leaseholders can claim these allowances providing they satisfy the entitlement criteria, set out below. Entitlement to Integral Features and Plant & Machinery within buildings In order to claim capital allowances the client must comply with four basic entitlement criteria: The client must own the relevant interest in the property freehold, leasehold or tenancy The client must have incurred expenditure on the provision of the equipment in order to claim the capital allowances The client must be a UK taxpayer UK resident or off-shore investor The building that the capital allowances are applicable to must be held as a fixed asset on the client s accounts Sponsored by: The success of any claim for capital allowances requires that these entitlement criteria are clearly established and quantifiable. The Capital Allowances Act 2001 The legislation that regulates the claiming of capital allowances is the Capital Allowances Act 2001 (CAA 2001). Amendments to CAA 2001 are introduced using Finance Bills in the year the amendment is to be enacted.
The Finance Bill in 2008 introduced a list which sets out the integral features of a building s mechanical and electrical systems and other building installations that qualify for capital allowances at the 8% rate and are allocated to the Special Rate Pool (SRP). Integral features 8% Special Rate Pool (SRP) Electrical systems (including lighting systems) Cold water systems Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems A clearer understanding of how the capital allowances process works is set out below by way of an example (see Table 1). In the tax year 2013-1 Company X construct an office block for leasing costing 10,000,000 with 3,500,000 being identified as qualifying for capital allowances. The level of allowances have been identified using contract information e.g. final account, as built drawings and the clients capital expenditure accounts for the project. The 3,500,000 identified as qualifying for capital allowances breaks down into the following pools: 8% special rate pool: 2,750,000 (integral features) 18% general pool: 750,000 (general plant & machinery) Lifts, escalators, and moving walkways External solar shading Active facades Photovoltaic (PV) installations Other elements of a building can also qualify for capital allowances and are referred to as general plant and machinery. These items qualify at the 18% rate and are allocated to the Main Pool (MP). The items listed below are examples of what can qualify and is not restricted to these items alone. What can be claimed in this category of capital allowances is regulated by CAA 2001 and case law. General plant & machinery 18% Main Pool (MP) Sanitary ware Carpets Trade specific floor finishes Fire alarm and sprinkler systems Intruder alarms, access control and CCTV The capital allowances for each pool are then claimed each year on a reducing balance basis. The cash flow saving is then calculated by applying the appropriate corporation or income tax rate to the total allowances for that year. The rate of return of the capital allowances varies between the two pools. The SRP will take 15 to 22 years to bottom out and 7 to 11 years for the MP. What are Enhanced Capital Allowances (ECA s)? The Enhanced Capital Allowance (ECA) scheme was introduced by the Finance Bill in 2001 to encourage businesses to invest in energy-saving equipment. It is an integral part of the climate change levy package. The scheme provides an incentive for your clients to make energy saving investments in specific technologies and products approved by the Department for Energy and Climate Change (DECC). The ECA scheme is an extension of the Integral Features () regime in that the benefit of the capital allowances are accelerated into one year and not over 15 to 22 years as with the SRP. Table 1: Example figures for the capital allowances process Year 2,750,000 Cash Flow Saving* 750,000 1 220,000 2,530,000 135,000 615,000 355,000 81,650 2 202,00 2,327,600 110,700 50,300 313,100 72,013 3 186,208 2,11,392 90,77 13,526 276,982 63,706 171,311 1,970,081 7,35 339,091 25,76 56,522 5 157,606 1,812,7 61,036 278,055 218,63 50,288 1,09,71 32,178 Writing down continues beyond year 5 * Cash flow saving based on the corporation tax rate of 23% for 2013/1
How can a client benefit from ECA s? to perform within the parameters of the published eligibility criteria for the relevant technology. Three of the four technologies covered by this process are: ECA s enable businesses to claim 100% first-year allowances (FYA s) on their spending on qualifying energy-saving plant and machinery in the year of investment. As such they attract higher levels of relief over and above integral features and general plant and machinery mentioned above. The higher energy efficiency standards of the approved equipment can assist in achieving the levels of energy performance required under the Building Regulations. Automatic, Monitoring and Targeting (AMT) equipment (component based) How does this affect the Building Services Engineer? Pipe work insulation However ECA s will only be maximised by the client if considerable pre-planning takes place by the building services engineer and/or specialists working together and prior to specifications and equipment choices being finalised. This valuable relief can therefore be heavily influenced (or not) by building services engineers. You should seek specialist advice if you do not possess sufficient capability in-house. If the building services engineer does not consider ECA s during the design stages and access specialist advice, the potential ECA content will, in all likelihood, be zero. This could result in an opportunity to accelerate the client s tax relief being lost. What are the next steps? The building services engineer should become familiar with the circumstances in which ECA s apply in relation to mechanical and electrical installations and consider the options available to the client before any specification becomes fixed or equipment choices are made. The later in the design phase this choice is left until the less flexibility there is to incorporate ECA compliant equipment. Listed and Non-Listed Technologies Any claim for Enhanced Capital Allowances (ECA s) must be approved by Her Majesty s Revenue and Customs (HMRC). Evidence will be required to support any claim for ECA s in the event of an HMRC enquiry. The supporting information will vary depending on whether the technology claimed is a listed or non-listed technology. Listed Technology: the products must be listed on the Energy Technology Product List (ETPL) at the time the expenditure was incurred or when the contract for the supply of the product was entered into. Non-Listed Technology: in order to be eligible for ECA s in this category specific technologies are required Lighting: High Efficiency Lighting Units (HELU s) lighting control systems white light emitting diode lighting units Confirmation of performance to the eligibility criteria relevant at the time should be provided by the supplier or installer of the product purchased. The confirmation can then be used as supporting evidence in the event of an HMRC enquiry. The supplier or installer should be made aware of the clients intentions regarding the claiming of ECA s. They should also be provided with a copy of the eligibility criteria to allow them to assess if the product(s) being purchased meets the required energy efficiency standards. The eligibility criteria for the technologies listed above can be found at the ECA web page: https://etl.decc.gov.uk/etl/site/criteria.html The fourth non-listed technology that requires confirmation of eligibility for ECA s is Combined Heat and Power (CHP) installations. The confirmation process however is not carried out by the equipment supplier or installer but by a third party assessor acting on behalf of the DECC. The Combined Heat and Power Quality Assurance (CHPQA) programme requires particular information in order to establish if the system to be installed is eligible for ECA s. ECA s can only be awarded if the CHP installation initially achieves Good Quality CHP status. A Certificate of Energy Efficiency for ECA s will then be issued stipulating the percentage of ECA s that can be claimed in line with the energy efficiency of the CHP installation. Guidance note 2: Use of CHPQA to Obtain Enhanced Capital Allowances published by the CHPQA gives more detailed information on how to claim ECA s. The guidance note can be accessed at the following DECC webpage along with further information on the programme and the application process: http://chpqa.decc.gov.uk/ What qualifies for ECA s? Qualifying spending is capital expenditure incurred on the provision of new energy-saving plant and machinery for business purposes. There are some exclusions and certain expenditure does not qualify for ECAs, in particular:
Expenditure incurred on used or second hand plant or machinery, and How do ECA s affect cash flow? Air-to-air energy recovery Continuing with the example introduced at the beginning of this briefing note (see Table 2). In the tax year 20131 Company X construct an office block for leasing costing 10,000,000 with 3,500,000 being identified as qualifying for capital allowances. In this scenario however 500,000 of ECA qualifying technologies has been incorporated into the M&E installation of the office block. Automatic monitoring and targeting 8% special rate pool: 2,250,000 (integral features) Boiler equipment 18% general pool: 750,000 (general plant & machinery) Expenditure incurred before 1 April 2002 on equipment acquired for leasing, letting or hire to other businesses. The current list of qualifying Energy Technologies is: Combined heat and power 100% Enhanced Capital Allowances: 500,000 (integral features identified as ECA qualifying) Compact heat exchangers Compressed air equipment Heat pumps Heating ventilation and air conditioning (HVAC) equipment Comparing the cash flow saving in Year 1 from both tables clearly highlights the advantages of installing ECA compliant equipment. There is also the potential benefit for long-term savings in utility bills by installing energy efficient equipment to consider. It is worth noting the points below as a reminder when talking to existing or potential clients about ECA s: High speed hand air dryers Lighting Investing in equipment that falls within one of the qualifying technologies doesn t mean that allowances can be claimed. Motors and drives Pipe work insulation Only approved energy saving products meet the scheme s eligibility criteria Refrigeration equipment Solar thermal systems Only expenditure incurred on products on the Energy Technology Product List can qualify for ECAs. Uninterruptible power supplies The product list can be accessed at the ECA website Warm air and radiant heaters With the exception of the non-listed technologies (in italics in the list above) the majority of the remaining listed technologies will have a number of sub-categories listed under them. Specifying energy efficient plant and machinery which qualifies for ECAs can assist in reducing energy costs and climate change levy payments (such as CRC) and reduce the impact on the environment Table 2: Continued example figures for the capital allowances process Year 2,250,000 100% ECA s 750,00 500,000 500,000 1 180,000 2,070,000 135,000 615,000 2 165,600 1,90,00 110,700 50,300 3 152,352 1,752,08 90,77 13,526 10,16 1,611,88 7,35 339,091 5 128,951 1,82,993 61,036 278,055 Writing down continues beyond year 5 * Cash flow saving based on the corporation tax rate of 23% for 2013/1 ECA s are claimed in the first year only. Cash Flow Saving* 815,000 187,50 276,300 63,59 23,126 55,919 21,599 9,358 189,987 3,697 1,739,012 399,973
A 19% tax credit is available in place of the 100% tax break where the claimant company is loss making. Details of the scheme can be found at http:// www.hmrc.gov.uk/manuals/camanual/ca23175.htm On costs The value of ECA s claimed should be the cost of the expenditure incurred by your client. This can also include additional costs such as transportation to site, relevant professional fees and the cost of installing the equipment. Feed-in Tariffs, Renewable Heat Incentives and ECA s As from April 2012 it is not possible to claim ECA s on a qualifying piece of equipment that is also receiving a Feed-in-Tariff (FiT) or Renewable Heat Incentive (RHI) payment. Legislation introduced via the Finance Bill 2012 allows the ECA s on the equipment to be claimed or a FiT or RHI payment only. Claim Values If the cost of the product being claimed cannot be identified then a claim value should be used. Claim values are published values for items of equipment that are components of a larger piece of equipment or system. They are only published for particular listed technologies and these can be viewed via the claim values information page on the ECA website: Remind your clients that claims must be based on the qualifying costs incurred and, where the product is part of larger piece of equipment or system, the claim must be limited to the value detailed on the claims value section of the ECA web site. ECA s and capital allowances such as the 8% special rate on integral features cannot be claimed on the same item of equipment. If the item is listed on the ETL then ECA s can be claimed. If the item is not listed on the ETL then capital allowances at the 8% Special Pool Rate (SPR) are claimed. Your client will more than likely use their accountant to submit their year-end tax figures to HMRC, which will have the overall capital allowances figure included. It is recommended however that a capital allowances specialist oversees the collation of information, compilation and submission preparation process required for the overall capital allowances figure. A statement of qualifying expenditure for capital allowances should then provided to your client s accountant. Capital allowances specialists have expertise in the areas of surveying and tax law, along with their understanding of mechanical and electrical systems this makes them more suited to compiling the finer detail required for any capital allowances claim. Where can I find more information? https://etl.decc.gov.uk/etl/site/criteria.html The key supporting evidence for a listed technology is the screen prints from the ECA website of the product being claimed and evidence of the expenditure incurred by the claimant. This can be an invoice if the product was directly purchased by the claimant or an interim valuation or final account showing the incurred expenditure was part of a programme of construction works. No claim values exist for non-listed technologies. The costs claimed should therefore follow the same evidence route as for a listed technology. How to make a claim Claims for ECAs are made in the same way as other capital allowances on the Corporation Tax Return for companies and the Income Tax Return for individuals and partnerships. Her Majesty s Revenue and Customs (HMRC) administer all claims for both Enhanced Capital Allowances (ECA s) and both special rate and general plant and machinery capital allowances. Details of the criteria for ECAs are available from the Government s ECA website, including the technology and product lists: https://etl.decc.gov.uk/etl/site.html The Inland Revenue has published guidance on the scheme for 100% Enhanced Capital Allowances and Energy Saving Investments. It can be viewed at the Inland Revenue s website: http://www.hmrc.gov.uk/manuals/camanual/index.htm The website of the Chartered Institution of Building Services Engineers for information on building services and online ordering of publications: www.cibse.org This briefing note was prepared by Robert Winters, Associate and ECA consultant, Davis Langdon, an Aecom Company. Whilst every effort has been made to ensure accuracy at time of publication (September 2013) information may be subject to legislative changes and may not reflect individual circumstances. Recipients should, therefore, not act on any information without seeking professional advice. 2013 Chartered Institution of Building Services Engineers, 222 Balham High Road, London SW12 9BS (+ 20 8675 5211)