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HMRC internal manual

Capital Allowances Manual

Plant and Machinery Allowance (PMA): First Year Allowance (FYA): expenditure incurred by energy services provider

CAA01/S175A, S180A, S182A, S192A & S195A

Normally a person who installs a fixture on land must have an interest in that land to be able to claim capital allowances on the fixture. This means that an energy service provider could be prevented from obtaining first-year allowances because the plant or machinery becomes a fixture on another person’s land in which they have no interest. Special rules have been introduced to address this issue.

An energy services provider is a business that provides a range of energy management services, including the provision, operation and maintenance of plant or machinery, aimed towards reducing their client’s energy bills. They are contracted by other businesses (clients) to manage their energy usage. This can take a variety of forms, from giving advice on how to reduce energy consumption, negotiating lower supply charges with energy providers, to designing, installing, operating and maintaining facilities on the client’s premises to achieve energy efficiencies or savings.

Often an energy services provider’s activities amount to little more than the provision of energy advice, followed by the supply and maintenance of plant or machinery to achieve energy savings. The machinery or plant is being leased. Expenditure incurred before 17 April 2002 on energy-saving equipment for leasing does not qualify for FYAs. Expenditure incurred on or after 17 April 2002 can qualify for FYAs, provided it would qualify for PMAs under the normal rules. The following paragraphs show the circumstances in which an energy service provider can claim 100% FYAs because its activities amount to more than leasing.

There are special rules that let an energy services provider claim 100% FYA, if the supply of plant or machinery to the client does not simply amount to the leasing of plant or machinery. These are particularly relevant to expenditure incurred before 17 April 2002. For example, in the combined heat and power (CHP) sector, the energy services provider will normally provide active and ongoing operational input to ensure the equipment performs to its optimum efficiency. In these cases, the energy services provider will be supplying energy efficiency and energy saving services, and the CHP installation will be a tool in that qualifying activity.

An energy services provider can also claim 100% FYAs on fixtures it installs at a client’s premises for the purpose of its energy management package even though it does not have an interest in the land to which the plant or machinery is fixed.

This rule is extended in the case of CHP to cases in which the land holder could not claim capital allowances if it had incurred the expenditure (for example a local authority) It applies only to situations in which the CHP is actively operated and managed by the energy services provider (such as CHP). 100% FYA is not available where the energy services provider provides energy management advice, then leases equipment (such as lighting systems) to a person who would not themselves be able to claim allowances had they incurred the expenditure.

The special rules provide that the energy services provider cannot claim 100% FYAs unless:

  • it makes an election with the client;
  • the plant or machinery is on the Technology list or Product list;
  • the plant or machinery is not for use in a dwelling house;
  • it, or another person with whom it is connected, carries out all, or substantially all of the operation and maintenance of the plant or machinery.