The Enhanced Capital Allowance scheme (ECA) has been designed to encourage businesses to invest in water saving and water quality improving technologies.
Key Features of the Scheme
All businesses are able to claim enhanced capital allowances, regardless of size, industrial or commercial sector or location. Enhanced capital allowances permit the full cost of the investment in specified technologies to be relieved for tax purposes against taxable income of the period of the investment.
The qualifying water recycling technologies will have to meet defined water saving criteria and will be published in the Water Technology List. Only investments in new and unused water recycling equipment such as rainwater harvesting products and greywater recylcing products can qualify.
How It Works
If your business pays corporation tax at 30%, every £1,000 spent on qualifying water recycling equipment would reduce its tax bill in the year of purchase by £300. In contrast, for every £1,000 spent the generally available capital allowance for spending on plant and machinery* would reduce your businesses tax bill in the year of purchase by £75. In other words, an ECA can provide a cash flow boost of £225 for every £1,000 it spends in the year of purchase**.
For further information see www.eca-water.gov.uk
* 25% a year on the reducing balance basis.
** ECAs provide 100% tax relief, so there is no further tax relief in later years. The general rate of capital allowances does not provide 100% tax relief so there is a balance of spending to carry forward on the reducing balance basis for relief in later years.
For example: A company has made a profit of £25,000 and purchased a piece of equipment costing £1,000. It pays corporation tax at 30%. The following calculations show the relative benefit of the ECA compared to the general capital allowance for plant and machinery.
|Capital allowance (at 25% a year on the reducing balance basis)||ECA (at 100% in the year the spending is incurred)|
|Equipment cost £1,000 Capital allowance (25%)||Designated ECA equipment cost £1,000|
|£250 Effect of allowances for tax (£250 @ 30%)||ECA (100%)£1,000|
|£75 In the year of investment, the capital allowances are worth £75, in terms of reduced tax.||Effect of allowances for tax (£1,000 @ 30%) £300|
|Capital allowances can be claimed on the unrelieved expenditure of £750 in later years.||In the year of investment, the ECA is worth £300 in terms of reduced tax.|
|Profit less capital allowance £25,000 - £250 = £24,750||Profit less allowance £25,000 - £1,000 = £24,000|
|Tax at 30% £24,750 x 30% = £7,425||Tax at 30% £24,000 x 30% = £7,200|
|Tax payable with capital allowances at the general rate £7,425||Tax payable with ECAs £7,200|
In this example, in the year of investment, if the company had invested in designated ECA water recycling equipment it would have paid £225 less tax compared to the same investment in less efficient equipment.