The Enterprise capital allowances scheme changed in April 2020 and is now open only to businesses investing in new plant or machinery for use in designated Enterprise Zones within England.
If you are a business that pays income or corporation tax, any capital expenditure on plant and machinery may qualify for tax relief by way of capital allowances. These allowances allow you to deduct some or all of the value of an item from your profits before you pay tax.
Enhanced capital allowances were first introduced at the turn of the century to encourage businesses to invest in energy and water-efficient technologies and products.
This included low-emission new cars, new vehicle electric charge points, new zero-emission goods vehicles, certain new energy-saving and water-efficient equipment, and certain new gas refuelling equipment.
By allowing a 100% first-year tax relief on investment in ECA qualifying items, the scheme provided a significantly increased tax saving over the alternative allowances available on these items.
The net effect of enhanced capital allowances was that businesses could potentially write off the entire cost of purchasing plant or machinery against their taxable income in a single tax year.
In this way, businesses could reduce investment costs and improve cash flow, whilst minimising the impact of the business on the environment.
The new criteria for enhanced capital allowances
From April 2020, the ECA is open only to companies operating in a government-designated Enterprise Zone.
There are over 40 Enterprise Zones across England, designed to encourage investment and economic growth through financial support and tax breaks.
Enhanced first-year capital allowances are intended to contribute to this by promoting capital investment by companies in a number of specific, designated sites within Enterprise Zones.
The ECA is available for UK resident-trading companies from 1 April 2012 to 31 March 2021. From 15 September 2016, ECAs are available for eight years following the establishment of new Enterprise Zones.
Qualifying ECA products & technologies
The business must own the plant or machinery being claimed against, have installed it ready for use or be using it already in their trade and have incurred the expenditure.
Only new plant and machinery are eligible for enhanced capital allowances, where used or second-hand plant and machinery do not qualify. Businesses can only claim against investment and not replacement expenditure.
Exemptions to the ECA
A number of specific exclusions apply to the ECA. Unincorporated companies, including partnerships, are not eligible for this relief, nor are certain sectors where expenditure does not qualify for allowances if it relates to:
- Fisheries and aquaculture sectors
- Transport sector or related infrastructure
- Management of waste of undertakings
- Coal, steel or shipbuilding
- Synthetic fibres sector
- Energy generation, distribution or infrastructure
- Development of broadband networks
- Primary production of agricultural products, including farm activities preparing a plant or animal for the first sale.
Claiming enhanced capital allowances
Enhanced capital allowances are commonly referred to as a first-year allowance, allowing you to deduct 100% of the cost of a qualifying ECA item from your pre-tax profits. This rate is significantly more generous than alternative available capital allowances.
You can also claim enhanced capital allowances in addition to your annual investment allowance (see below), whereby they don’t count towards your limit.
However, you are only able to claim the full 100% if you make the claim within the same tax year as the purchase for your qualifying item.
That said, if you don’t claim all the first-year allowances you are entitled to, you can still claim part of the cost in the next accounting period using what’s known as ‘writing down allowances’. This is where you deduct a percentage of the value of an item from your profits each year.
You are able to do this at any time provided you still own the qualifying item, although it offers much less attractive rates.
To claim enhanced capital allowances, you will need to do so through your business’s income or corporation tax return, in the same way as any other capital allowance.
Profit & loss-making companies
Enhanced capital allowances can be a straightforward way for a business to improve its cash flow through accelerated tax relief.
If a profitable business pays corporation tax at 19%, every £100,000 spent on qualifying items would reduce its taxable profits in the year of purchase by £19,000.
However, loss-making companies can also realise a tax benefit from their investment in qualifying technologies with what’s known as ‘payable ECAs’. Here a company can surrender any losses attributable to enhance capital allowances in return for a cash payment from the Government.
The amount payable to any company claiming payable ECAs will be expressed as 19% of the loss that is surrendered. So if a company surrenders a loss of £100,000, the payable ECA it will receive is £19,000.
These tax credits do, however, operate with an annual cap that equates to either £250,000, or the total of the company’s PAYE and National Insurance liabilities for the year in which the claim is made, whichever is greater.
An increase in the annual investment allowance
The good news is that enhanced capital allowances only become necessary in circumstances where any business investment exceeds the annual investment allowance (AIA).
This means that your business will still benefit from the AIA on any expenditure on plant and machinery up to a specified annual amount each year.
It is only where businesses spend more than the annual limit that you will need to seek additional relief under the capital allowances and enhanced capital allowances regime.
The annual investment allowance is currently set at £1 million, but will drop to £200,000 on 1 January 2021.
Key takeaway for enhanced capital allowances
Enhanced capital allowances can offer significant tax benefits where a business, investing in qualifying plant and machinery, meets the eligibility criteria.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.