Rising to the challenge

The Green Technology Challenge (GTC) tax incentive will provide 100 per cent first year enhanced capital allowances (ECAs) for companies investing in innovative technologies which contribute to environmental protection, but what, exactly will it mean to your business? IEM first reported on the GTC at consultation stage in October last year, and since then the government has made a number of important announcements prior to the scheme's launch. Jason Rayfield reports on what the GTC is, what technologies it will cover, and most importantly, how it could save your company money.


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The Treasury’s announcement of a Green Technology Challenge to provide tax

breaks for green technologies owes a large debt to six years of high level lobbying

by the Environmental Industries Commission (EIC), on behalf of its members.

Subsequently in the 2002 Budget, the government made the following

announcements:

  • It will introduce ECAs for investments in five groups of energy-saving technologies:

    heat pumps, radiant and warm air heaters, solar heaters, energy-efficient

    refrigeration equipment and compressor equipment. Subject to EU state aids

    approval, the government anticipates that these technology groups will be

    added to the lists of qualifying technologies during the summer.

  • It has introduced ECAs for the purchase of business cars with carbon dioxide

    emissions not exceeding 120g/km.

  • It has also introduced ECAs for investments in compressed natural gas (CNG)

    and hydrogen fuelling infrastructure.

  • The scheme for energy-saving technologies, as well as the new schemes,

    will cover investments in assets for

    leasing.

  • The government also intends to introduce ECAs for investments in designated

    technologies to minimise water use and improve water quality during 2003.

    Work is proceeding to define the most appropriate qualifying technologies.

  • The government’s statement of intent, as far as environmental taxation goes,

    is to support the polluter-pays principle for environmental policy; that is;

    those that pollute should be responsible for paying for the environmental cost

    that they impose on society as a whole. However, there are circumstances where

    tax incentives – rather then levying taxes – may be the most appropriate policy

    instrument.

    Tax relief

    Enhanced Capital Allowances, which form the heart of the Green Technology Challenge,

    are a particular type of tax incentive which enable businesses to take relief

    on the full cost of investment in the first year (this relief is normally given

    at a rate of 25 per cent a year). ECAs bring forward relief, so that it can

    be set against profits of a period earlier than would otherwise be the case.

    Businesses are therefore able to write-off the whole cost of their investment

    against their taxable profits of the period during which they make the investment.

    Returning to my opening paragraph: so what does all this mean to your business?

    In order to gain clarity, we need to understand the nature of capital allowances.

    Blaise Marin-Curtoud is a partner and head of tax group at Gouldens, and in

    an EIC presentation on GTC at the recent et2002 exhibition in Birmingham, he

    outlined the tax implications when applied to business.

    According to Blaise, in order to understand the GTC scheme introduced in 2001,

    it is necessary to have a general understanding of the scheme of current capital

    allowances legislation. The following is taken from his presentation.

    Corporation Tax (for companies) and Income Tax (for sole traders and partnerships)

    are taxes on profits. Although the starting point for any calculation of the

    tax due by a business is its profits as shown in its accounts, rules have evolved

    which allow (and often require) businesses to adjust their accounting profits

    for tax purposes. In particular, depreciation charged by a business in its accounts

    is not an allowable deduction (for tax purposes) in computing profits.

    However, tax legislation does have a set of rules which allows businesses to

    deduct from their profits an amount which is similar, in nature, to depreciation:

    allowances for certain types of capital expenditure, generally referred to as

    capital allowances.

    Profit allowance

    Under the plant and machinery allowances code, a business which incurs capital

    expenditure on the acquisition of an item of plant or machinery can claim an

    allowance of 25 per cent (on a reducing balance basis) against its profits.

    Say, for example a manufacturing company acquires a machine (for a total sum

    of £1,000,000) which it uses to manufacture its product. If all relevant

    conditions are satisfied, the company can deduct £250,000 from its profits

    for the first year (£1,000,000 at 25 per cent), £187,500 for the

    second year (£750,000 at 25 per cent) and so on until the balance of the

    expenditure is negligible.

    In simplistic terms, the allowance is the tax equivalent of the depreciation

    charged by the company in its accounts for the element of machinery. In tax

    terms, the allowance gives relief from tax (spread over a number of years) for

    the cost of the machine. This reduces the actual cost of the machine to the

    company.

    It is important to keep in mind that allowances, even if they are given initially,

    may subsequently be clawed back. Where a business which has claimed allowances

    on an item of machinery sells that machinery, it will either suffer a charge

    (referred to as a balancing charge) if the machinery is sold for more than the

    balance of the expenditure on which the allowances have been given (the tax

    written down value), or could claim a balancing allowance.

    Qualifying expenditure

    As explained earlier, plant and machinery allowances are usually given at a

    rate of 25 per cent on the residue of the qualifying expenditure incurred. Under

    the ECA scheme introduced for energy saving equipment, provided all relevant

    conditions are satisfied, allowances will be equal to 100 per cent of the qualifying

    expenditure in the first year.

    This means that if a particular item of plant and machinery qualifies under

    the new scheme, the person entitled to allowances will see the purchase price

    of the machinery reduce by 30 per cent for companies or 40 per cent for individuals

    and partnerships.

    The conditions for the expenditure to qualify are fairly simple. The equipment

    must be unused and not second-hand. This prevents enhanced allowances being

    claimed where the item of machinery is bought from a person which already used

    the machinery. The expenditure must be incurred on or after 1 April 2001, as

    well as being incurred on energy saving equipment – defined as equipment which

    is specified as such by the Treasury.

    In practice, the government has decided that it would adopt, for these purposes,

    a list of equipment which is published by DEFRA and updated on a regular basis.

    The following are the broad categories of equipment which have been included

    on the list

    • Combined heat and power (CHP);
    • Refrigeration equipment;
    • Boilers and add-ons;
    • Thermal screens;
    • Motors;
    • Lighting;
    • Variable speed drives (VSD); and
    • Pipe insulation.

    Hopefully, some light has now been shed on exactly what the Green Technology

    Challenge is and ways that it can benefit your business, but before you reach

    for your accountant’s business card, it is important to bear in mind a few practical

    issues.

    The first of these is to ensure that the equipment purchased meets the technical

    specifications which are set out in the energy product list. In respect of the

    items falling under the combined heat and power heading of this product list,

    it is necessary for a certificate of energy efficiency to be enforced in relation

    to the plans. The certificates are issued by the Secretary of State for the

    Environment.

    The second point concerns a scenario where all of the items of plant is specified

    on the products list, the amount of the allowance will, in most cases, be equivalent

    to the expenditure incurred.

    However, where the energy saving equipment is part of a larger piece of plant

    and machinery, special rules apply to determine the amount of expenditure on

    which the enhanced allowance can be claimed in respect of a particular component

    where the item of plant and machinery incorporate more than one such component,

    the enhanced allowance can be claimed on the aggregate of all the values listed

    for the qualifying components.

    Where the item of plant and machinery which comprises a component specified

    on the list is purchased and paid for in instalments, it will be possible to

    claim an allowance based on a proportion of the instalment payments made in

    the relevant period. That proportion is broadly equal to the proportion which

    the aggregate of the expenditure on the energy saving components bears to the

    aggregate expenditure on a particular item of plant and machinery.

    Another crucial detail is to ensure you have sufficient supporting evidence

    of having actually incurred the expenditure when making a claim under GTC. This

    procedure is unfortunately complicated in cases where the energy saving item

    is only part of a larger piece of plant which itself does not qualify for any

    enhanced allowances. It will be necessary for the tax payer to be able to demonstrate

    that the relevant components meet the criteria set out in the energy production

    technology list and to consult the list in order to determine the expenditure

    on which the enhanced allowance can be claimed.

    A greener future?

    Although much progress has been made on the Green Technology Challenge, the

    scheme has been criticised for its lack of scope. The EIC, for example, represents

    all sectors of the environmental technology and services industry, and as such

    continues to press the government for the incentive to encourage the development

    and use of innovative environmental technologies across all sectors of the environmental

    technology market. At present the GTC does not cover a whole range of key sectors,

    including control of air pollution from industry, remediation of contaminated

    land, oil spills, waste treatment and recycling.

    EIC actively supports the GTC and is working towards its success; but it will

    continue to press the government, which is committed to reviewing the GTC, following

    EIC lobbying, for it to be extended to all sectors to help tackle the many other

    environmental problems the British public faces.

    © Faversham House Ltd 2022 edie news articles may be copied or forwarded for individual use only. No other reproduction or distribution is permitted without prior written consent.

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