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.
The table below compares the effects of the rates of general plant and machinery allowances and 100% first-year capital allowances for a company paying tax at 28%. There is no additional outlay in years 2-10 for the Capital Allowance – the figures are here to illustrate how the allowance is calculated.