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Enhanced Capital Allowances (ECAs) are a tax relief given through the tax system by reducing the taxable profits of the business. The ECA scheme builds on existing statutory provisions, under which businesses may obtain tax relief, in the form of capital allowances, for their investment in plant and machinery.
Capital allowances allow the costs of capital assets to be written off against a business's taxable profits. They take the place of depreciation charged in the commercial accounts which is not allowed for tax. The main rate of allowances for plant and machinery is 25% a year on the reducing balance basis, which spreads the benefit over a number of years (about 95% of the cost is relieved in 8 years). ECAs have been granted in other areas before but this is the first time that they have been introduced for use to support energy efficiency. ECAs enable businesses to claim 100% first-year capital allowances on their investment in designated energy-saving plant and machinery in the year in which the expenditure is incurred. ECAs bring forward relief, so that it can be set against profits of a period earlier than would otherwise be the case. The benefit to businesses of ECAs is thus a cash flow boost resulting from the reduction of the business's tax bill of the year in which the investment is made. Capital Allowances can be claimed on capital expenditure incurred on the provision of plant and machinery for use in a business's trade. It is a requirement of the legislation that as a result of incurring the expenditure the machinery or plant belongs to the person making the claim. Some assets will not qualify for ECAs. These include assets that are buildings or structures as defined by sections 21 to 23 Capital Allowances Act 2001 as these assets do not qualify for plant and machinerycapital allowances.
Claims for ECAs are made in the same way as other capital allowances on the Corporation Tax Return for companies and the Income Tax Return for individuals and partnerships. The Inland Revenue's guidance on the ECA scheme can be found at www.inlandrevenue.gov.uk/capital_allowances/eca-guidance.htm.
The Inland Revenue administers claims for ECAs and they have wide-ranging powers to investigate any aspect of the return. If errors are identified, any tax underpaid may be recovered with interest and, in cases of negligent or fraudulent conduct, penalties. Penalties cannot exceed 100% of the tax that would otherwise have gone unpaid.
Claims must be based on the costs incurred. Where you have purchased a qualifying Product that is not already incorporated into a larger item of plant and machinery you must use the price paid for the item as the base of your claim. If you have purchased a qualifying product which is incorporated into a larger piece of equipment, the eligible claim value is provided in the Claim Values section of this site. The remainder of the equipment can attract capital allowances at the normal (rather than the Enhanced) rates.
The words ‘on the provision of machinery or plant’ in the Capital Allowances Act are interpreted narrowly and exclude remote or indirect expenditure. Some common types of cost are detailed below:
Direct transportation and installation costs can be regarded as expenditure on the provision of plant or machinery. These can include, for example, the costs of transport, crainage costs to lift machinery in to place, project management costs, installation, modifications to existing plant and machinery, and commissioning.
Professional fees qualify only if they are directly related to the acquisition and installation of assets that are plant or machinery. Fees incurred on such things as feasibility studies or design work are generally too remote from the acquisition and installation to qualify. The eligibility of such costs is a question of fact based on the particular circumstances of the case.
Costs of alteration to an existing building arising as a direct result of the installation of qualifying plant and machinery may be eligible for ECA.
For information on claiming products under specific technology groups, please see the "Products and Claims" section of the site. http://www.eca.gov.uk
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