Team - Controlling your environment.

Why was it introduced?
The Government introduced the ECA scheme in 2001 to encourage businesses to invest in low carbon, energy-saving equipment. As part of the Climate Change Levy Programme, it’s designed to help the UK reach its Kyoto target of reducing carbon emissions by 20%. Website - www.eca.gov.uk/etl
Climate change is becoming one of the biggest threats to our planet’s environment, and the biggest cause of this is carbon emissions produced by burning fossil fuels. Around half of these come from businesses and industrial processes, so it’s important that efforts to reduce emissions focus on these areas

What does the ECA Energy scheme involve?
The scheme provides a tax incentive to businesses that invest in equipment that meets published energy-saving criteria. The Energy Technology List (ETL) details the criteria for each type of technology, and lists those products in each category that meet them. It is managed by the Carbon Trust, on behalf of the Government.

Key Features of the ECA scheme
Open to all businesses that pay UK corporation or income tax, regardless of size, sector or location.
Provides 100% first-year capital allowances on investments in energy-saving equipment against taxable profits of the period of investment.
All the products listed on the ETPL must meet the energy-saving criteria, published in the ETCL.
Only spending on new and unused energy-saving equipment can qualify for ECAs.
Capital allowances are available for spending “on the provision of” plant and machinery. This can include certain costs arising as a direct result of the installation of qualifying plant and machinery such as transport of the equipment to the site, and some direct installation costs.
All businesses that incur qualifying spending can claim ECAs. ECAs bring forward the time that capital allowances are available for spending on plant and machinery thereby providing a cash flow advantage.
The general rate of capital allowances is 25% a year on a reducing balance basis. For example, if a business spent £1,000 on a new boiler, it could claim capital allowances of £250 (25% of £1000) against the taxable profits of the period of investment. Assuming the company pays corporation tax at 30%, the effect of the capital allowance for spending on the boiler in the period of investment would be to reduce the business’s tax bill by £75 (£250 @ 30%).
The unrelieved balance of £750 (£1,000 less £250) is carried forward for relief against profits of later years. In this way the spending is written off over a number of years.
If, however, the business invested the same amount in a high efficiency boiler from the Energy Technology Product List, it could claim a 100% first-year capital allowance of £1,000 against the taxable profits of the year of investment. Again assuming the company pays corporation tax at 30% the effect of the first-year allowance would be to reduce the business’s tax bill by £300 (£1,000 @ 30%) Thus, the first-year allowance can confer a cash flow advantage.
The table below compares the effects of the rates of general plant and machinery allowances and 100% first-year capital allowances for a company paying tax at 30%. There is no additional outlay in years 2-10 for the Capital Allowance – the figures are here to illustrate how the allowance is calculated.