Making allowances for energy
David Harris of ACS Group Services discusses the recent government sponsored Enhanced Capital Allowance scheme, whereby tax breaks are given for those companies investing in energy efficient refrigeration products.
Humans have known for centuries that keeping food cold will preserve it, but for many hundreds of years the only means they had of keeping it that way was to pack it in natural ice or snow. Although this technique is still used, we have progressed somewhat in terms of refrigeration technology. Today’s refrigeration systems are slightly more complicated and operate using a volatile liquid, circulated by a compressor around a container.
Over time, people have found more and more uses for refrigeration. Scientists and engineers have developed many different types of refrigerator that have become widely used in farming, food production, factories, buildings and shops to name but a few. Nowadays, most people in Europe have at least one fridge (and usually a freezer) in their home, and air conditioning in their offices and cars. Consequently, the refrigerator must be regarded as one of the most valuable inventions of recent times. Unfortunately it is also responsible for many environmental problems.
Firstly, refrigeration uses a lot of energy. Secondly, certain chemicals in machinery used to cool, chill or freeze are very harmful to the environment if they are released into the atmosphere. Refrigeration in the home environment is just the tip of iceberg (forgive the pun); it is industry that is the main polluter, responsible for vast amounts of harmful fumes, gases, and energy consumption, much of which could be prevented.
Energy usage in industry has become such a topic of discussion that it is one of the major points of focus at many environmental summits worldwide. Following the signing of the internationally legally binding agreement at the Kyoto summit, the government has chosen the fiscal route to encourage UK industry to use less energy. As part of its commitment to combat global warming, on 1 April 2001 it introduced the Climate Change Levy on all non-domestic energy use. The Climate Change Levy is being charged on all energy supplied and it will typically add 8-15 per cent to the energy bills of businesses.
The new UK Climate Change Levy on energy consumption adds an additional and very real cost motivation to install energy efficient refrigeration systems. This is a reward/punishment measure aimed at ensuring the achievement of the UK’s target to combat greenhouse gas emissions and global warming.
The Climate Change Levy affects a variety of energy products including refrigeration and air-conditioning units. Inefficient units consume excessive energy resulting in a substantial tax penalty for the operator. However, whether a company is in a position to take advantage of the reductions or not, it is in their interest to seek out ways of reducing energy consumption.
The Chancellor, Gordon Brown, in his November 1999 Pre-Budget Report, announced his support for business investment in energy efficient technologies under the Climate Change Levy package. This allowed for the introduction of a 100 per cent first year Enhanced Capital Allowance scheme, and a £50 million fund for energy efficiency and renewable materials.
Capital allowances allow the costs of capital assets to be written off against a business’ taxable profits. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax. The main rate of allowances for plant and machinery is 25 per cent a year on the reducing balance basis, which spreads the benefit over a number of years (about 95 per cent of the cost is relieved in eight years).
The Chancellor proposed that the ECA scheme would support technologies and products that meet the relevant energy efficiency criteria. These include; combined heat and power (CHP), boilers, motors, variable speed drives, lighting, pipe insulation materials, thermal screens and refrigeration. Under the ECA scheme, businesses investing in energy saving products must comply with the Energy Technology Product List, which lists the qualifying products for the scheme.
ECAs can provide businesses with an immediate cash flow boost, shorten the investment’s payback period and reduce Climate Change Levy payments. More importantly, investing in energy efficient refrigeration products will reduce your energy costs for years to come.
All businesses paying income tax or corporation tax are able to claim, apart from those who are leasing the assets i.e. the end user, not the supplier or contractor. However, investments from 17 April 2002 in qualifying energy saving equipment for leasing, letting or hire can qualify for an ECA.
Qualifying expenditure can include the actual cost of buying the equipment as well as direct costs such as installation and transport of the equipment to the site. In addition, if you are involved in a contract where new machinery is installed, then the end user can claim where the supplier is able to identify the investment in qualifying equipment and where the end user has incurred capital expenditure on that equipment.
If you are paying for the qualifying products in instalments then the normal tax rules apply, but generally you can claim the allowances as you incur the expenditure. As ECAs are a tax relief given through the tax system by reducing the taxable profits of a business, they are claimed in the same way as other Capital Allowances on the Corporation Tax Return for companies and on the Income Tax Return for individuals and partnerships.
The words ‘on the provision of machinery or plant’ in the Capital Allowances Act exclude indirect expenditure. However, direct transportation and installation costs can be regarded as expenditure on the provision of refrigeration equipment. These might include the costs of transport, project management costs, installation or modifications to existing refrigeration and air conditioning units. In addition, professional fees only qualify if they are directly related to the purchase and installation of refrigeration and air conditioning equipment.
Every year over £12 billion worth of energy is wasted in the UK alone with refrigeration being responsible for its fair share of that figure. Refrigeration is expensive to run and can be the main outgoing for many retail outlets and supermarkets, accounting for up to 60-70 per cent of total energy consumption.
The potential savings from a financial perspective are substantial. Perhaps more importantly though, as the business world is becoming increasingly accountable for its part in the growing ecological problem, it faces increasing pressure from the public to continually improve its responsibility to the environment. The ECA scheme provides a perfect opportunity to show a willingness to help the problem whilst saving money at the same time.
The key features of the scheme are as follows:
- All businesses are now able to claim enhanced capital allowances, regardless of size, industrial or commercial sector or location.
- Enhanced capital allowances permit the full cost of the investment in specified technologies to be relieved for tax purposes against taxable income of the period of the investment.
- The qualifying technologies will have to meet defined energy saving criteria. They will be published in a list, and the criteria will be reviewed on an annual basis; there are no territorial restrictions on manufacturers wishing to place their products on the list or the source of products.
- Only investments in new and unused plant and machinery can qualify.