Enhanced capital allowances explained

Companies are already able to offset any type of capital expenditure against their taxable profits. This requires a claim to be made for a diminishing proportion of the initial expenditure each year.

A quarter of the original cost can be offset in the first year, and in each subsequent year 25% of the remaining amount can be reclaimed. This means that it becomes less worthwhile to make the claim in each subsequent year.

The enhanced capital allowances scheme covers energy efficient products, and also water conservation plant and low-CO2 cars. It enables companies to offset 100% of their investments in the first year - an important advantage.

Peter Stones, financial programmes manager at the Carbon Trust - which has administered the scheme since August 2002 - says the enhancement is worth 5-10% of the capital investment over 10 years, depending on the discount rate applied.

A list of qualifying energy efficient products was first published in March 2001 and is updated monthly. A Treasury order gave statutory effect to the list in July 2001, allowing claims for ECAs to be made from that date.

In subsequent Budgets, the Chancellor tightened the criteria for some existing categories and extended the scheme to cover 13 technologies:

  • Automated monitoring and targeting equipment

  • Boilers

  • Refrigeration equipment

  • Motors

  • Variable speed drives

  • Thermal screens

  • Combined heat and power

  • Lighting

  • Pipework insulation

  • Heat pumps for space heating

  • Radiant and warm air heaters

  • Solar thermal systems

  • Compressed air equipment

  • Related Environmental Services

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