Pay Less Tax and Help the Environment
- Published: 30th June 2017
In our last article, exploring how capital allowances are received, we mentioned first-year allowances (FYAs). FYAs give tax relief more quickly than writing-down allowances and include enhanced capital allowances (ECAs).
ECAs were introduced to provide an incentive for occupiers, investors and developers to include energy and water saving plant and machinery (P&M) in commercial properties.
Typically P&M which qualifies for ECAs includes: air to air energy recovery equipment; boiler equipment; combined heat and power equipment; compressed air equipment; heat pumps; heating equipment; ventilation and air conditioning equipment (HVAC); high speed hand air dryers; lighting; motors and drives; pipework insulation; warm air and radiant heaters.
A developer, for example, proposes to build offices for an occupier which will claim capital allowances. The construction expenditure will be £500,000. At say 40% of construction expenditure capital allowances would amount to £200,000. If these allowances were written down at 12% per annum (a blended rate of 18% and 8%) in the first year there would be £24,000 of allowances. Assuming a tax rate of 19% the first year tax saving would be £4,560. If the developer has considered ECAs at the outset the first year tax saving could be considerably higher. If say 25% of the £200,000 of allowances were ECAs then the occupier would receive the benefit of £50,000 of allowances in the first year rather than over a period of time. This would increase the first year tax saving to at least £11,780, and probably to more than that. For simplicity this example assumes that the annual investment allowance is not available (perhaps because it has been allocated to another company in the same group).
The occupier will not only benefit from capital allowances tax savings but will also benefit from lower energy bills as a result of the energy and water efficient P&M, not to mention green credentials.
If you are building, altering, extending or refurbishing a property, or fitting out let property, you may be entitled to claim ECAs. Stuart Rivers Associates would be pleased to review the specification with your design team to maximise ECA first year tax savings.
We hope that this short article introducing enhanced capital allowances has been of interest and we would be happy to discuss any point with you in more detail.