ECA Scheme

The Advanced Capital Allowance Scheme – ECA

The new Enhanced Capital Allowance (ECA) scheme has been introduced as a tax incentive to encourage firms to invest in energy saving technologies. The scheme is now managed by the Carbon Trust.

The Carbon Trust is an independent not for profit company set up by the Government with support from business to take the lead on low carbon technology and innovation in this country, and put Britain in the lead internationally (Tony Blair).

What Is The Capital Allowance Scheme

Currently businesses may obtain tax relief, in the form of capital allowances, for their investment in machinery and plant.  Companies pay 30% corporation tax on the profits they make (SMEs pay 40% in the first year followed by 25% a year)

The normal capital allowance rate is 25% a year on the reducing balance basis which spreads the benefit over a number of years (about 95% of the cost is relieved in 8 years).

With the Enhanced Capital Allowance  companies can reduce the taxable amount by 100% in the first year .

EXAMPLE

Company X has profits of £100,000, and spends £10,000 capital on a new heating system.

  • If there was NO capital allowance  of any sort, they would pay 30% tax on their total profits (@ 30% = £30,000).
  • With a standard capital allowance  they can reduce the taxable amount by 25% of £10,000 in the first year (£2,500), meaning they pay tax on £97,500 (@ 30% = £29,250) in the first year.  GIVING A TAX SAVING OF £750 . This continues year by year at 25%. of the outstanding balance.
  • With an ENHANCED CAPITAL ALLOWANCE  the company can reduce the taxable amount by 100% in the first year , meaning they will pay tax on £90,000 (@ 30% = £27,000) instead of tax on £97,500 (@30% = £29,250) in the first year. GIVING A TAX SAVING OF£2250   much greater than with the standard capital allowance

Enhanced capital allowances bring forward tax relief, resulting in significant cash flow benefits .

What else is included ?

  • Cost of qualifying plant and machinery
  • Installation costs
  • Professional fees (consultancy fees)
  • Costs of altering an existing building

What is NOT Included

  • Investments in maintenance or replacement heating systems that are not classed as capital spending (and therefore already attract the 100% first year tax write off)
  • Public sector bodies are excluded because they do not pay income/corporation tax

Further information is available on the official ECA web site, operated by the Carbon Trust. Go to www.eca.gov.uk