Capital allowances: Ending enhanced allowances for energy and water efficient plant and machinery
Published 29 October 2018
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Who is likely to be affected
Businesses purchasing qualifying plant and machinery, as listed on the Energy Technology List (ETL) and Water Technology List (WTL), which use energy efficiently or are environmentally beneficial.
General description of the measure
The measure will update the lists of energy efficient and environmentally beneficial technologies and products which are eligible for first-year allowances also known as Enhanced Capital Allowances (ECA).
The measure will also end the first year allowance for products on the ETL and WTL, including the associated first year tax credit, from April 2020 onwards.
The first year allowance schemes currently allow 100% of the cost of an investment in qualifying plant and machinery to be written off against the taxable income of the period in which the investment is made, improving cash flow for businesses.
The FYTC provides a tax credit for loss making businesses who invest on qualifying items listed on the technology lists.
Policy objective
To update the ETL and WTL for 2019 to 2020 to reflect developments in eligible technologies.
To end the first year allowance and first year tax credits for products on the ETL and WTL from April 2020. The revenue saved by this will be used to fund the Industrial Energy Transformation Fund.
Background to the measure
This measure was announced at Budget 2018.
The ECA for products on the ETL was introduced in 2001. The ECA for products on the WTL was introduced in 2003. The lists have generally been updated annually.
The ECAs and FYTCs for the ETL and WTL will be ended in April 2020 to give businesses time to prepare for the changes.
Detailed proposal
Operative date
The updates to the ETL and WTL will come into effect on the date set by the statutory instrument. The schemes will both end with effect from 1 April 2020 for companies and 6 April 2020 for unincorporated businesses.
Current law
Capital expenditure by businesses on plant and machinery normally qualifies for tax relief by way of capital allowances.
Once businesses have fully used their annual investment allowance (AIA), which has been £200,000 since 1 January 2016, plant and machinery allowances are available at 18% main rate and 8% special rate.
These schemes provide an alternative 100% first year allowance for expenditure on certain energy saving or environmentally beneficial technologies (sections 45A and 45H Capital Allowances Act (CAA) 2001), which have only been beneficial to a small number of businesses that have fully used their AIA.
The government decides on the availability of the first year allowance, with the qualifying technologies published in the ETL and the WTL.
Proposed revisions
A Statutory Instrument will be made to amend the lists of technologies that qualify for the energy efficient and environmentally beneficial schemes.
Legislation will be introduced in the Finance Bill 2018-19 to remove the first year allowances scheme for energy efficient or environmentally beneficial plant or machinery within sections 45A, 45B, 45C, 45H, 45I and 45J of CAA 2001.
These sections will be repealed entirely with references to energy saving plant or machinery and environmentally beneficial plant or machinery being removed within sections 39 and 52(3) CAA 2001.
Legislation will be introduced in the Finance Bill 2018-19 to amend schedule A1 to CAA 2001. This will be required to remove the ability for companies and unincorporated businesses to claim first-year tax credits for losses attributable to the environmentally beneficial scheme.
This will come into force from 1 April 2020 for companies and 6 April 2020 for unincorporated businesses.
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | |
|---|---|---|---|---|---|---|
| Abolishing the ECAs and FYTC for ETL and WTL | - | +10 | +50 | +100 | +80 | +75 |
These figures are set out in Table 2.1 of Budget 2018 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.
The Office for Budget Responsibility has included the impact of the update of the eligibility list separately in its forecast at Budget 2018.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
This measure has no impact on individuals or households as it only affects businesses.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts for those in groups sharing protected characteristics.
Impact on business including civil society organisations
This measure will affect businesses who incur expenditure on plant and machinery that qualify for the schemes.
The first year allowance for the schemes allow qualifying expenditure to be written off in the accounting period in which the investment is made, thereby improving businesses cash flow.
For the vast majority of businesses the majority of the expenditure they incur on plant and machinery will still be eligible for full relief under the separate Annual Investment Allowance (AIA), at up to £200,000 per year since 1 January 2016 which will leave their cash flow unchanged.
Other businesses will need to identify the products that qualify and make a claim before the first year allowance ends in 2020 and claim for their expenditure under the relevant writing down allowance.
This means that there will be one-off administrative costs to businesses of changing the allowances they claim, but we do not expect that there will be any ongoing administrative costs.
There will also be one-off costs to businesses from the updates to the ETL and WTL as they familiarise themselves with the new lists.
Small and micro business assessment: This measure applies to all sizes of business, but in practice there is expected to be very limited impact on small firms, the large majority of which incur less than the AIA limit annually on capital expenditure.
These measures will have no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
It is anticipated that there will be minor operational impact on HMRC arising from this measure as changes will be made to tax forms to remove the relevant boxes for claiming the relief.
Other impacts
Carbon assessment and wider environment impact, it is not anticipated that this will result in negative environmental impacts.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from BEIS (Department for Business, Energy and Industrial Strategy) and Defra (Department for Environment, Food and Rural Affairs) until it comes to an end in 2020.
The lists of technologies and products that qualify for the schemes have been reviewed by BEIS and Defra to ensure that the lists remain updated and that qualifying criteria are discussed with suppliers to ensure they remain accurate and effective.
Further advice
If you have any questions about this change, contact Tunde Ojetola on Telephone: 03000 585 916 or email [email protected].