My 11-year-old daughter is part of a generation driven by the words of Greta Thunberg to change the world for the better. The above quote was made on 21 September 2019 after seeing millions of people around the world marching against climate change. The change announced by the Chancellor in October 2018 to end enhanced capital allowances (ECAs) for energy and water efficient (‘green’) plant and machinery is not the change Greta was referring to. However, there is still time for businesses to benefit from ECAs even though the recent Budget did not replace ECAs with some other incentive to encourage businesses to invest in energy efficient plant and machinery.
What are ECAs all about?
ECAs are tax allowances that improve cashflow for UK businesses. In particular, they allow 100 per cent of the cost of qualifying green plant and machinery to be written off against taxable profits, on top of any other capital expenditure qualifying for the annual investment allowance. A claim for ECAs must be made within two years of the end of the relevant accounting period for a company or tax year for individuals or partnerships. So, there is still plenty of time after April 2020 to make ECA claims and benefit from the enhanced tax relief, as well as a short period to incur relevant expenditure that could qualify.
Why abolish this green tax relief?
In my opinion it just didn’t work. The system for identifying green plant and machinery was too complex, and it was very difficult to establish if the plant and machinery purchased actually qualified for ECAs. This reduced the number of claims and made the incentive ineffective. However, with the Government announcing its legally binding commitment to net-zero carbon emissions in June last year, now is not the time to remove a tax incentive for investment in green plant and machinery just because it is too complex. Surely the answer is simplification, which after all is a stated aim of the current Government.
A significant amount of green plant and machinery that qualifies for ECAs is found in newly constructed commercial property. Without reinventing the wheel, the Chancellor could re-introduce ECAs for such expenditure in newly constructed commercial property by linking tax relief to the world's longest established method of assessing, rating, and certifying the sustainability of buildings, known as BREEAM (Building Research Establishment Environmental Assessment Method). The more sustainable the building the quicker the tax relief. Simple.
So, with the date of abolition of ECAs for green plant and machinery fast approaching (ECAs are retained for certain other expenditure), businesses should make sure they consider the timing of expenditure on plant and machinery that might qualify for the enhanced allowances. It would be a shame to delay the purchase for a few weeks into April only to miss out. If money has been spent on plant and machinery that might qualify there is still time to make a claim and benefit from the tax cash flow advantage it brings. I am hoping the Chancellor reads this article and thinks about a very simple replacement regime to continue to provide a tax incentive to UK business to help reach net zero carbon emissions by 2050.