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Capitalising on green agenda

1 Dec 08

Companies that are spending on environmentally friendly items can get cash flow benefits

Recent changes to the capital allowances regime have made enhanced capital allowances (ECAs) more widely available and valuable in cash terms.

ECAs enable a business to claim 100 per cent first-year capital allowances for their spending on qualifying plant and machinery. ECAs have been designed with a green agenda in mind: the three expenditures business can claim ECAs on are energy-saving plant and machinery; low CO2 emission cars and natural gas and hydrogen refuelling infrastructure; and water conservation plant and machinery.

For these, businesses can write off the whole of the capital cost of their investment against their taxable profits of the period during which they made the investment. The benefits are then two-fold: a very welcome cashflow boost and a short payback period.

Despite its seemingly obvious benefits, a recent Government survey confirmed that the take up of ECAs has been poor. Given the erosion of the relief given through the standard capital allowances regime and the increasing pressure to reduce energy costs, more businesses need to understand how to make ECAs an integral part of their cost reduction strategy.

To encourage loss-making companies to claim this allowance, the Government has introduced an additional tax credit of 19 per cent, subject to various anti-avoidance provisions, which is available where a company has a relevant surrenderable loss.

The key to a successful ECA claim is being able to map expenditure from procurement through to tax analysis, ensuring the relevant personnel are educated in terms of which technologies qualify for the relief, what the qualifying criteria are on an asset-by-asset basis and ensuring that they have retained the correct documentation.

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