Budget zone

Budget 2008: April capital allowance reforms usher in green tax credits

Headline-grabbing reforms to the capital allowance system will offer 100% first year tax credits for designated energy-saving and environmentally beneficial plant and machinery, and 100% allowances for a range of low-impact and green technologies.

The 100% first year allowance scheme to encourage purchases of low-polluting new company cars will be extended for five years, but with the threshold lowered from 120g/km to 110g/km of C02 emissions.

The 100% FYA scheme for biofuel & refuelling plant has also been extended for five more years and a new category of water-saving equipment has also been added to the green technologies that qualify for 100% FYAs.

The 2008 Finance Bill will include a raft of new clauses setting out reforms originally announced last year to the capital allowances regime.

Budget Note 14 explains that under the new enhanced capital allowances (ECA) regime effective from 1 April, companies that make a loss during the period in which they invest in energy-saving equipment will be able to surrender their tax losses in return for a cash payment equivalent to 19% of the loss surrendered.

The tax credit carries an upper limit which is based on the greater of: the company's total PAYE and NIC liability for the period; or £250,000. A company can only surrender a loss for the first-year tax credit where it has not been otherwise relieved and the 19% payment cannot be claimed if the loss could be used by the company to offset other taxable profits or be surrendered as group relief.

The new rules also contain a claw back provision if the equipment is sold within four years of the credit being paid.

A comprehensive technical note on the new ECA regime was published as part of the 2007 pre-budget report, which was discussed in some detail by Giles Downes of Bourne Business Consulting this February.

As announced last year, the finance bill will also introduce a new annual investment allowance for the first £50,000 businesses spend on plant and machinery each year. BN12 explains that small and medium size companies can still claim first year allowances on certain types of machinery they buy before the end of this tax year (40% relief available for incorporated businesses before 31 March, 50% available for unincorporateds before 5 April), but these SME allowances will no longer be available after those dates.

Draft legislation will feature in the Finance Bill covering a range of capital allowance reforms and transitional arrangements. The new measures were explained in the following budget notes:

BN06: Industrial buildings allowances, enterprise zone allowances and agricultural buildings allowances. The phased withdrawal of industrial and agricultural buildings allowances over a four-year period starts from 1 April. Enterprise zone allowances will also end on 1 April 2011, but will not be subject to the phasing out rules.

BN07 & BN08: 'Plant and machinery allowances; integral features and thermal insulation' & 'Rate changes and new special rate pool'. The main rate of writing-down allowances for new and unrelieved plant and machinery (including cars) will be reduced from 25% to 20%. "Integral features" as defined in new finance bill clauses and other long-life assets will be allocated to a new "special rate" pool qualifying for writing down allowances of 10%, up from 6%.

BN10: '100% first-year allowances for natural gas, biogas and hydrogen refuelling equipment'.

BN13: Enhanced capital allowances for energy-efficient and water saving technologies'.

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