Extend first year tax credits for 5 years and reduce the rate of claim
Published 22 November 2017
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Who is likely to be affected
Loss-making businesses purchasing designated plant and machinery which uses water or energy efficient equipment.
General description of the measure
This measure extends First Year Tax Credits (FYTC) until 31 March 2023 and sets the rate of eligible claims to two-thirds of the Corporation Tax (CT) rate. It applies to the products and technologies covered by the energy-saving (energy) and environmentally-beneficial (water) first year allowances (FYA) schemes.
Policy objective
FYTC provide relief for loss-making businesses which purchase efficient technology supported by the energy and water schemes. The schemes mitigate the barrier of high purchase-costs where the efficiency of a product can provide savings to businesses and wider environmental benefits. The schemes aim to reduce the consumption of energy 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.
Background to the measure
FYA allow profit-making businesses to deduct the full cost of investments in energy and water technology from their taxable profits. Loss-making businesses do not make profits, so they cannot claim these tax breaks. Instead, loss-making UK businesses can claim tax credits – FYTC – when they invest in products that feature on the Energy Technology and Water Technology lists. FYTC was introduced in 2008 for five years. It was extended in 2013 to ensure that loss making businesses are encouraged to purchase the most efficient water and energy products. When the scheme started, the claim percentage was set at 19% which was two-thirds of the 28% CT rate.
Detailed proposal
Operative date
The changes to the scheme will come into effect on 1 April 2018.
Current law
Capital expenditure by business on plant and machinery normally qualifies for tax relief by way of capital allowances. The energy-saving and environmentally-beneficial schemes provide 100% first-year allowance for expenditure on certain energy-saving technologies.
Loss-making businesses are able to surrender the losses attributable to FYA in exchange for a cash payment known as FYTC. The current rate of claim is 19%.
The FYTC is due to expire on 31 March 2018.
Proposed revisions
Legislation will be introduced in Finance Bill 2017-18 to amend Schedule A1 to Capital Allowances Act 2001. It will extend the scheme for five years and the rate of claim will be set at two-thirds of the CT rate in line with the original policy intention. The scheme will expire on 31 March 2023.
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 |
|---|---|---|---|---|---|
| - | Negligible | Negligible | Negligible | Negligible | Negligible |
The measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
The measure will not impact on households. Although it is possible for individual employees to claim capital allowances, it is unlikely that any would claim FYTC.
The measure is not expected to impact on family formation, stability or breakdown as it is aimed at plant and machinery used by business.
Equalities impacts
The FYTC scheme is aimed at loss-making businesses. Following discussions with the Department for Businesses Energy and Industrial Strategy (BEIS) and the Department for Environment, Food and Rural and Affairs (Defra) on these changes, HM Revenue and Customs (HMRC) has not identified any impact on any specified groups.
This measure does not impact on the equality of groups with protected characteristics.
Impact on business including civil society organisations
The measure will impact those loss-making businesses, including small and micro businesses, incurring business expenditure that qualify for the schemes. As loss-making businesses do not make profits, they will be able to surrender the losses attributable to these schemes in exchange for a cash payment.
The measure is expected to have a negligible impact on business administrative burdens. There will be one-off costs for businesses who consider buying products affected by the changes to comply with the link to the CT rate.
Any time there is a change to the CT rate, eligible businesses will incur the costs of changing the percentage they claim to ensure that the rate of their claim is reduced from 19% to two-thirds of the CT rate.
For 99% of eligible businesses there will be only a minor impact because the CT rate has been set at 19% till 2020, and then 17% from 2020. On-going costs include making a claim for the cash payment through their tax return.
There is no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
It is anticipated that there will be no significant operational impacts on HMRC arising from this measure with no IT changes required.
Other impacts
Carbon assessment 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.
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 (eligible for this payable credit) are also reviewed every year by BEIS and Defra. This ensures that the list remains relevant and that qualifying criteria are discussed with suppliers to ensure they remain accurate and effective.
Further advice
If you have any questions about this change, please contact Tunde Ojetola on Telephone: 03000 585916 or email: tunde.ojetola@hmrc.gsi.gov.uk