Policy paper

Enhanced capital allowances schemes for energy saving and environmentally beneficial (water-efficient) technologies

Published 14 July 2015

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 profits 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

Subject to state aid approval, 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 2015 Parliamentary recess on 21 July 2015.

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 for the period 1 April 2014 to 31 December 2015 is £500,000, plant and machinery allowances are available at 18% main rate and 8% special rate. These two 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 of Energy and Climate Change (DECC) 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 energy-saving scheme to include adoption of the waste heat to electricity sub-technology, and removal of the packaged chillers sub-technology, both at negligible cost. The qualifying criteria for 11 current technologies will also be revised to clarify the qualifying criteria for a number of technologies, and to incorporate changes in technical standards.

Details on when the new lists take effect will be published in the Energy Technology List (ETL) and Water efficient enhanced capital allowances sections of the GOV.UK website.

Summary of impacts

Exchequer impact (£m)	2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020
	negligible	+£5m	+£15m	+£10m	+£10m
	These figures are set out in Table 2.1 of Budget 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside the Budget.
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 DECC 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 £500,000 per year until 31 December 2015. For those businesses that have fully used their AIA, the updates will come into effect in the summer 2015. 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) (HM Revenue and Customs (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 DECC 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 contact Tunde Ojetola on Telephone: 03000 585916 or by email:tunde.ojetola@hmrc.gsi.gov.uk.

Declaration

Damian Hinds MP, Exchequer 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.