Enhanced capital allowances schemes for energy saving and environmentally beneficial (water-efficient) technologies
Published 3 November 2016
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Who is likely to be affected
Businesses purchasing designated plant and machinery which uses energy efficiently, reduces water use or improves water quality.
General description of the measure
This measure updates the lists of technologies and products covered by the energy-saving and water efficient enhanced capital allowances (ECA) schemes. The schemes allow 100% of the cost of an investment in qualifying plant and machinery to be written off against the taxable income of the period in which the investment is made, improving cash flow for businesses.
Policy objective
The schemes aim to reduce the consumption of energy and water by business, by encouraging their investment in the most efficient plant and machinery. This can help reduce overall energy costs and carbon emissions, aiding the UK’s carbon reduction obligations, and encourages the sustainable use of water resources.
Background to the measure
Since their introduction, in 2001 and 2003 respectively, the schemes have been updated annually to ensure that only the most efficient products are supported.
Detailed proposal
Operative date
The changes to the schemes will have effect on and after a date to be appointed by Treasury Order, to be made prior to the summer 2016 Parliamentary recess on 21 July 2016.
Current law
Capital expenditure by business on plant and machinery normally qualifies for tax relief by way of capital allowances. Once businesses have fully used their annual investment allowance (AIA), which has been £200,000 since 1 January 2016, plant and machinery allowances are available at 18% main rate and 8% special rate. These 2 ECA schemes provide an alternative 100% first-year allowance for expenditure on certain energy-saving and water efficient technologies, which is particularly beneficial for those businesses that have fully used their AIA.
Recommendations for updates to the list of qualifying technologies and products for the schemes, and reviews of the relevant criteria are made annually by the Department for Business Energy and Industrial Strategy (BEIS) in respect of the energy saving scheme, and by the Department for Environment, Food and Rural Affairs (Defra) in respect of water. These departments then consult on the relevant changes. Treasury ministers decide on the availability of the ECA, with the qualifying technologies published in the Energy Technology Criteria List and Water Technology Criteria list.
Proposed revisions
Secondary legislation will amend the list of technologies that qualify for the water efficient scheme to include creating a new sub-technology for an early leak warning device and clarifying the qualifying criteria for Leak Detection Equipment to incorporate changes in technical standards. For the energy-saving scheme, the qualifying criteria for ten current technologies will also be revised.
Secondary legislation will also amend the reference to the Department of Energy and Climate Change (DECC) in Article 2 of SI 2001/2451 to BEIS.
Details on when the new lists take effect will be published in the Energy Technology list and Water Technology list sections of the GOV.UK website.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| Neg | £5m | £5m | £5m | £5m |
These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.
Economic impact
The measure is not expected to have any significant economic impact on the overall UK economy. It should encourage businesses to concentrate their investments on technologies which will receive ECA.
Impact on individuals, households and families
This measure will not impact on households. Although it is possible for individual employees to claim capital allowances, it is unlikely that any would claim ECA.
Equalities impacts
The ECA schemes are aimed at businesses. Following discussions with BEIS and Defra on this year’s amendments, HM Revenue and Customs (HMRC) has not identified any impact on any specified groups.
Impact on business including civil society organisations
The updates will have a negligible impact on businesses and civil society organisations. These updates only apply to business expenditure that qualifies for the schemes.
There will be some negligible one-off costs for businesses who consider buying products affected by the updates, including understanding what differences the updates may make to the capital allowances that they can claim.
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 separate AIA, at up to £200,000 per year since 1 January 2016.
For those businesses that have fully used their AIA, the updates will come into effect in the summer 2016. The scheme and qualifying products will be published in advance on GOV.UK. Where contracts have been finalised for the delivery of qualifying plant and machinery that are to be removed from the scheme as a result of the changes, those items will still qualify for the allowance even if delivered after the updates take effect.
Operational impact (£m) (HMRC or other)
This change will not increase HMRCs processing or compliance resource needs.
Other impacts
Small and micro business assessment: This measure applies to all sizes of business, but in practice it will only affect those with qualifying plant and machinery expenditure above the level of the AIA. As a result there is expected to be very limited impact on small firms, the large majority of which incur less than the AIA limit annually on capital expenditure. However, should a small business decide to write off the cost of qualifying plant and machinery under the schemes, rather than AIA, they will need to identify the products that qualify and make a claim. Carbon emissions and wider environment impact: by incentivising investment in energy and water efficient technologies, this measure should reduce carbon emissions and encourage sustainable use of water resources.
Potential other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through regular communication with affected taxpayer groups.
The lists of technologies and products that qualify for the schemes are also reviewed every year by BEIS in respect of the energy-saving scheme, and by Defra in respect of water. This ensures that the lists remain relevant and that qualifying criteria are discussed with suppliers to ensure they remain accurate and effective.
Further advice
If you have any questions about this change, please contact Tunde Ojetola on Telephone: 03000 585 916 or email: tunde.ojetola@hmrc.gsi.gov.uk.
Declaration
Jane Ellison MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.