The Enhanced Capital Allowance (ECA) scheme enables businesses to claim 100% first-year capital allowance on investments in energy-saving equipment, against the taxable profits of the period of investment.
The general rate of capital allowances is 20% a year on a reducing balance basis. For example, if a business spent £1,000 on a new boiler, it could claim capital allowances of £200 (20% of £1,000) against the taxable profits of the period of investment. Assuming the company pays corporation tax at 28%, the effect of the capital allowance for spending on the boiler in the period of investment would be to reduce the business’s tax bill by £56 (£200 @ 28%).
The unrelieved balance of £800 (£1,000 less £200) is carried forward for relief against profits of later years. In this way the spending is written off over a number of years.
If, however, the business invested the same amount in a high efficiency boiler from the Energy Technology Product List, it could claim an 100% first-year capital allowance of £1,000 against the taxable profits of the year of investment. Again assuming the company pays corporation tax at 28% the effect of the first-year allowance would be to reduce the business’s tax bill by £280 (£1,000 @ 28%). Thus, the first-year allowance can confer a cash flow advantage.
The 100% first-year capital allowance relieves all the qualifying spending. Therefore there is no unrelieved spending to carry forward against profits of later years.