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Mystery surrounds the tax break for energy efficiency

ImageA decade has gone by since the introduction of Enhanced Capital Allowances. Just how effective this tax rebate remains open to debate

It is now ten years since a key tax break to stimulate investment in energy efficiency was announced. Whether the Enhanced Capital Allowances has been a success is impossible to say, but there is every likelihood it will continue nonetheless.

The concept behind the Enhanced Allowances is simple. With all conventional capital expenditure on plant or machinery, businesses can set 20 per cent of any expenditure against any profits during the year of purchase. But if the plant or machinery in question is one of over 14,000 named products on the official Energy Technology Product List, then the company can write off the entire cost of qualifying equipment against the taxable profits in the year of purchase.

That does not increase the total amount that can be claimed over a five-year period. But it does improve a company’s cash flow. This is how it works.

If a business spends £10,000 on conventional equipment, it can normally claim capital allowances of £2,000 against profits in the initial year, and carry forward £8,000 of relief for the subsequent four years. With corporation tax at 28 per cent, the effect of the standard purchase would be to reduce the tax bill by £560 in that initial year. And then by a further £560 for each of the next four years.

But if the £10,000 purchases in question do appear on the magic Energy Technology Product List, the effect is to reduce the corporation tax bill by £2,800 in that initial year. Of course, in this case there would be nothing left to claim against tax in future years.

As far as the public purse is concerned, the only actual cost is the interest lost on not being able to hang on to all those £560s due for the ensuing four years: at a time of relatively low interest rates, that is a relatively trivial amount of lost revenue to the Treasury.

How trivial (or how great) are the total sums involved are a complete unknown. Why is this? Because for some reason, Her Majesty’s Revenue and Customs has never altered its tabulating system to establish what proportion of corporation taxes are being re-claimed at 100 per cent, and what proportion at the conventional 20 per cent. So it is impossible to assess just how many companies have been making use of the tax break.

That said, even were it possible to establish an accurate figure for the number of tax claims made, it could well underestimate the impact that this scheme is having upon the marketplace.

For a start, the very existence of an Energy Technology product list has an influence upon those operating in the public or non-profit sector. Just by appearing on this list gives any product a formal imprimatur of acceptability, which of itself gives confidence to prospective purchasers who are not paying corporation tax.

The list is held by the Carbon Trust. It is separated into fifteen different technology sectors. These are:

  • air-to-air energy recovery;
  • automatic monitoring and targeting (AMT);
  • boiler equipment;
  • combined heat and power (CHP);
  • compact heat exchangers;
  • compressed air equipment;
  • heat pumps for space heating;
  • heating, ventilating and air-conditioning zone controls;
  • lighting;
  • motors & drives;
  • pipe work insulation;
  • radiant and warm air heaters;
  • refrigeration equipment;
  • solar thermal systems;
  • interruptible power supplies.

When it was launched, the Trust’s then (and now) technology director, David Vincent, acknowledged that the official eligibility list for ECAs was turning the list into a “useful marketing tool” for manufacturers. He felt it would provide a form of product reassurance and endorsement, akin to the Energy Saving Trust’s “energy efficiency” logo for the residential sector.

Regrettably, no improvements to the building fabric have ever been eligible under the scheme, which has led to some vociferous (and justifiable) complaints regarding possible distortion of investment decisions – particularly if inclusion on the list is accepted as a “useful marketing tool”.As with lighting, no individual products within this sector are included among the 14,000 on the list. Those wishing to install such technologies must rely upon the product installer to ensure they qualify. In contrast, component-based AMT and CHP are deemed to be bespoke technologies for each site; so a formal government certificate is required on each occasion to ensure such investments qualify.

We may have no idea how much extra energy efficiency investment is being stimulated by this cash-flow-assisting tax break. It would be helpful if the Revenue could let us know some time.

But in the interim, the proof of the scheme’s value could be the perpetual pressure for products to be added to the Carbon Trust’s official list. If it wasn’t felt to be of advantage, presumably nobody would bother to qualify. A bit of a negative endorsement. But clearly, this modest tax break remains better than none at all.

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