Over the last few months, we’ve received many enquiries about Enhanced Capital Allowances (ECAs). So we thought we’d share our thoughts.
ECAs apply to energy-saving and environmentally beneficial plant and machinery. They are aimed at incentivising businesses to invest in assets which will save them money. via reduced water and energy bills, and benefit the environment. Here’s how they work:
When you buy a an asset, something which is used in your business for a number of years, the cash goes out the door at the point of purchase and you’d hope that the same amount would reduce your profits on which you pay tax.
But no. For such an asset, the cost for tax purposes is split over a number of years.
For example you buy a kiln to fire mugs—the types of mugs we can see in shop windows for the Jubilee. This kiln costs £20,000. The amount allowed as an expense is £4,000 in the year of purchase.
However, if you were buying Rain Water Harvesting machinery, again costing £20,000, then the whole of the cost in the year of purchase can be taken as an expense.
If your profits before adjusting for the new machinery were £20,000, and you invested in the kiln your profits would be £16,000 and you’d face a £3,200 tax bill. If you invested in Rain Water Harvesting machinery, your profits would now be £0 and you’d have no tax to pay.
These ECAs plus the savings made from introducing such technology, can make investing worthwhile.