Real Business

April 2007

How the Carbon Trust's Enhanced Capital Allowances Scheme is encouraging businesses to invest in energy-saving equipment and machinery British businesses are spending millions on wasted energy and needlessly emitting hundreds of thousands of tonnes of carbon into the atmosphere. As the effects of climate change become increasingly apparent, the need for businesses and public sector organisations to take steps to cut carbon emissions – the main cause of climate change - has never been greater.

Help is at hand from the Carbon Trust, an independent company funded by Government which provides businesses and public sector organisations with practical advice on cutting their carbon footprint and reducing energy bills. By working with the Carbon Trust, most businesses can save up to 20 per cent on their energy bills - last year, we helped our customers identify 3.9m tonnes of annual CO2 savings, with potential annual cost savings of approximately £390m. 

Investing in energy saving technologies is a great way for businesses to improve efficiency and reduce energy bills. However, many businesses baulk at the cost of purchasing energy-saving equipment which normally carries a price premium. The good news is that, as part of an energy-efficiency drive, businesses can improve their cash flow by investing in equipment which qualifies for 100 per cent first-year enhanced capital allowances (ECA) for energy-saving plant and machinery.

Managed by the Carbon Trust, on behalf of Government, the ECA scheme provides businesses with upfront tax relief on their capital expenditure on qualifying energy-saving plant and machinery.  ECAs allow a business to write off the whole cost of the equipment against the taxable profits of the year of purchase.  This can provide a cash flow boost and an incentive to invest in energy-saving equipment which normally carries a price premium compared to less efficient alternatives.

Qualifying equipment must meet or exceed challenging energy-saving performance criteria. The criteria are kept under review, and where necessary, are revised to reflect current best practice or energy-saving technological development.  Energy-saving performance criteria published as the Energy Technology Criteria List (ETCL), can be viewed at www.eca.gov.uk/energy and covers the following categories:

• Air-to-air energy recovery  • Automatic Monitoring and Targeting (AMT)• Boilers equipment• Combined heat and power (CHP) • Compact heat exchangers • Compressed air equipment • Heat pumps for space heating • Heating, Ventilation and Air-Conditioning (HVAC) zone controls • Lighting • Motors and Drives• Pipe work insulation • Radiant and warm air heater• Refrigeration equipment • Solar thermal systems.

For most technology categories the products are listed on the Energy Technology Product List (ETPL) which is effectively a catalogue of energy-saving plant or machinery, listing more than 14,000 energy-saving products. For some categories (lighting and pipework insulation) the equipment must meet the published energy-saving criteria, and a business can confirm this with the installer. Component-based AMT and CHP are bespoke technologies and a business requires a certificate of energy-efficiency from DEFRA for its spending to qualify for ECAs. As with other capital allowances, a business claims ECAs on its tax return.

The general rate of capital allowances for spending on plant and machinery is 25 per cent a year on the reducing balance basis.  For example, if a business spends £10,000 on equipment it could claim capital allowances of £2,500 against the profits of the year of purchase (and carry forward £7,500 for relief in later years).  If the business pays tax at 30 per cent, the effect of the allowances would be to reduce its tax bill by £750.  If a business paying tax at 30 per cent spends £10,000 on energy-saving equipment, the effect of the ECAs would be to reduce its tax bill by £3,000 for the year of purchase, as the spending has been fully relieved so there is no balance to carry forward for relief in later years. So the effect of the ECAs is to bring forward the time that tax relief is available, which can provide a boost to cash flow.

The accelerated tax relief and cash flow benefit provided by the ECA scheme, coupled with the life cycle cost savings incurred through using energy-saving equipment help bridge the equipment’s price premium and shorten the investment payback period. 

More and more businesses are waking up to the financial gains that can be made through better energy efficiency and, by doing so, are playing a vital role in cutting carbon emissions and tackling climate change. For more information on the ECA scheme and ETL visit www.eca.gov.uk/energy.  For more guidance on working with the Carbon Trust, you can ring the Advice Line free on 0800 085 2005 or visit www.carbontrust.co.uk.