Capital Allowances for Energy and Utilities

Capital allowances can be a real game-changer when it comes to managing your property-related taxes. They function as a kind of tax-deductible expense and are available when you spend on specific assets that are used for your trade or rental business. This setup allows you to gradually write off the cost of an asset over a certain period.

What are Capital Allowances for Energy and Utilities?

Capital allowances for energy and utilities are like tax deductions that businesses can claim on certain capital expenses. These expenses are for energy-efficient and environmentally friendly assets. The idea is to encourage businesses to invest in green technologies and adopt practices that help the environment. It’s all about promoting sustainability, conserving energy, and making a positive impact on our planet.  

Full Expensing

Full expensing is a great benefit of capital allowances, especially for businesses making significant investments in assets. This type of capital allowance comes as a replacement for the super-deduction capital allowance, which was available from 1 April 2021 to 31 March 2023. 

This capital allowance type allows you to deduct the full 100% of the expenditure in the same year. Consider a scenario where a business has a tax liability of £1m. If this business decides to spend £2m on a new production line, which qualifies for the full expensing first-year allowance, they can use this allowance to reduce their tax liability by £500k. That’s a significant saving! However, please note that with the gradual introduction of the corporation tax increase to 25% for companies from April 2023 to March 2024, the exact amount of tax savings for a company may change during this period.

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is like a helping hand in the energy and utilities sector. It’s designed to encourage investment by allowing businesses to deduct the full value of certain things, such as energy-efficient machinery and equipment, from their profits before paying tax. Essentially, it’s a way to get a nice tax break if your company is making significant investments in energy and utilities.

Here’s an example: with the AIA, you can get tax relief on up to £1 million spent on qualifying plant and machinery. So if your company invests the full amount in energy-efficient equipment, you can deduct it all from your profits before calculating your tax bill. That’s a pretty sweet deal and could save your firm a bundle in the energy and utilities sector!

Writing Down Allowance (WDA)

The Writing Down Allowance (WDA) is like a helpful companion in the world of capital allowances. Instead of getting all the tax relief at once, it offers a gradual way to benefit over time. So, if your company has invested in assets that don’t qualify for full expensing or the Annual Investment Allowance (AIA), the WDA comes to the rescue!

With this allowance, you can deduct a percentage of an item’s value from your profits each year. It’s particularly useful for assets with long lifespans, enabling you to claim tax relief over several years. The deduction rate depends on the asset type. For example, most items of plant and machinery qualifies for an 18% deduction, while integral features of buildings and long-life assets receive a 6% deduction. It’s a fantastic tool to have for long-term investments. Just remember to apply it correctly to make it work for your business.

Research and Development Allowances

Research and Development Allowances (RDAs) are like a friendly pat on the back for businesses exploring new and innovative ways of doing things. They motivate firms to invest time, money, and resources into creating better products, services, or ways of working. If your company is spending on research and development, this allowance is here to help!

RDAs allow your business to write off 100% of qualifying capital expenditure on R&D against taxable profits for the period of expense. For example, a business involved in R&D projects focused on improving energy storage systems, enhancing renewable energy technologies, or developing energy-efficient processes in utilities could deduct these costs from the profits before paying taxes.

Here’s an example: Imagine your company spends £200,000 on a new R&D facility. The RDAs allow you to deduct this entire cost from your taxable profits in one go, helping you lower your tax bill and retain more money in your business. It’s a fantastic way of promoting innovation and encouraging businesses to push boundaries and think outside the box.

Benefits of Capital Allowance Tax Relief for Energy Efficient Equipment

Capital allowances can offer a multitude of advantages, from claiming an immediate tax or cash benefit, reducing or even completely sheltering a tax liability, to improving your cash flow and retaining more money in your business. It’s important to mention that there’s no cap on high earners claiming wear and tear allowances and most industrial buildings allowances. And here’s the cherry on top, it might be possible to get a cash refund or repayment of taxes. Capital allowances are not categorized as a “specified relief”, making them a useful tool for your business.

What Are Capital Allowances?

Utility Allowances and What They Mean

Utility allowances refer to the value of utilities, namely electricity, gas, and water, that are included in a participant’s gross rent. It’s important to clarify that these allowances do not cover services like telephone or cable TV. So, when you’re planning your budget and considering your expenses, remember to factor in these utility allowances. This bit of knowledge can be a game changer, helping you manage your finances more effectively and make the most of your capital allowances in the energy and utilities sector.

Types of Allowances that Can be Claimed on Utilities

There are several types of allowances you can claim on utilities, which could save your business a decent chunk of money.

Water Efficient Capital Allowances

If your business invests in water-efficient equipment, you may be eligible for water-efficient capital allowances. This means you can claim the cost of such equipment against your taxable profits. Items that might qualify for this include water-efficient toilets, faucets, or a rainwater harvesting system.

Energy Saving Allowances

Similarly, if your business puts money into energy-saving technology, you may be able to claim energy-saving allowances. This could apply to investments in energy-efficient lighting, heating, or insulation.

Renewable Energy Allowances

The government also encourages businesses to invest in renewable energy. If your business purchases equipment for generating renewable energy such as solar panels or wind turbines, you may be eligible for renewable energy allowances.

Qualifying Expenditures on Energy and Utility Capital Allowances

There are several classes of technology on which your company can spend and claim capital allowances. These expenses include energy-efficient motors and drives, lighting equipment, building energy management systems, and ICT equipment.

Similarly, heating and electricity provision equipment, and Process and HVAC Control Systems designed to achieve high levels of energy efficiency could also qualify for allowances.

Electric and alternative fuel vehicles, refrigeration and cooling systems, electro-mechanical systems, and catering and hospitality equipment can also be claimed if they’re designed to be highly energy efficient.

How Elect Can Help You Claim Capital Allowances for Energy and Utilities

Elect is your trusted team of professional capital allowances advisors. With our meticulous process, we leave no stone unturned. We go above and beyond to determine if you’re entitled to claim, carefully reviewing purchase contracts, development agreements, supporting documentation, and lease agreements.

We work closely with your project design team, estate agents, or finance team to gather the necessary cost and finance information. In cases where cost information is unavailable, our in-house quantity surveyors will professionally estimate the likely apportionment of expenditure. We’ll even conduct a site visit if needed.

Claiming capital allowances can be risky, especially with the legislative changes introduced by HMRC in the Finance Act of 2012. But don’t worry, we’ve got you covered. Our expertise in tax legislation, HMRC practices, and surveying, combined with our attention to detail and use of technology, allows us to prepare thorough and well-researched capital allowance claims. Through a comprehensive analysis of your total capital expenditure incurred, we’ll identify the maximum amount of qualifying expenditure and prepare a detailed report to support your claim. You can trust us to handle it all.

FAQs

What is the first year allowance for energy and utilities?

The First Year Allowances (FYA) for energy and utilities allow businesses to claim up to 100% of the cost of qualifying energy and water-efficient equipment against taxable profits in the year of purchase. This means that if your company invests in certain energy-saving or water-efficient equipment, you may be able to write off the full cost of the asset from your profits before tax in the first year, instead of over several years. This results in quicker tax savings, benefiting your business. The list of qualifying technologies is regularly updated by the government. It’s always a good idea to consult your tax advisor or a specialist like Elect to ensure that your investment qualifies.

Can I claim capital allowances on solar panels as a business expense UK?

Absolutely, solar panels can indeed qualify for capital allowances in the UK. If your business invests in solar panels, you can claim these as a business expense against your taxable profits. This falls under the category of ‘Renewable Energy Allowances.’

When did the capital allowances for energy-saving and environmentally beneficial (water-efficient) technologies end?

As part of the Government’s ongoing efforts to update and streamline the capital allowances regime, there have been some changes made to the lists of energy-efficient and environmentally friendly technologies and products. These changes will impact the eligibility of these products for first-year allowances, also known as Enhanced Capital Allowances (ECA), starting from April 2020. We want to ensure that the Energy Technology List (ETL) and Water Technology List (WTL), along with the associated first-year tax credit, are included in this adjustment.