Background Note
11.Capital allowances allow the cost of capital assets to be written off in computing the taxable profits of a business. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax.
12.Most businesses are entitled to an annual 100 per cent allowance, the Annual Investment Allowance (AIA), for their investment in most P&M up to an annual limit, which from April 2012 will be £25,000 per annum. For expenditure above that limit, writing-down allowances (WDA) are available, which from April 2012 will be given at the main rate of 18 per cent or the special rate of 8 per cent per annum. The legislation lists (in section 104A of CAA) the categories of expenditure that are special rate; special rate expenditure includes expenditure on integral features of a building and on long-life assets (generally equipment expected to have a useful economic life of 25 years). If expenditure is not designated as special rate then it will attract allowances at main rate.
13.First-year allowances (FYAs) may be available for expenditure on certain types of plant or machinery as an alternative to AIA and WDA. FYAs are special allowances, currently available at a rate of 100 per cent, which provide a cash flow advantage over normal WDAs (as all the qualifying expenditure may be deducted from profits in the year in which it is incurred), as a targeted incentive to invest in particular P&M. FYAs, commonly described as enhanced capital allowances (ECAs), may be claimed on designated energy-saving P&M that meets the criteria required by either the Energy Technology Product or Criteria Lists.
14.The Energy Act 2008 provided for incentives to encourage low carbon energy and heat generation. The Feed-in Tariffs (FITs) scheme was introduced on 1 April 2010 and is designed to incentivise small scale electricity generation. The renewable heat incentive (RHI) supports heat generation from renewable sources. Generally, technologies that qualify under the FITs scheme will not be eligible for FYAs. However, many, although not all, of the technologies that could qualify for tariffs under the RHI scheme could also qualify for FYAs.
15.FYAs are intended to complement, rather than duplicate, the effects of other Government policies supporting such investment. Therefore, the legislation is being amended so that FYAs will not be available for expenditure on P&M, where the P&M generates heat or electricity or produces gas or fuel that attracts a tariff under either the FITs or the RHI scheme.
16.Businesses will be able to choose whether to claim the benefit of FYAs or tariff payments but will not be able to receive both. Where an FYA is given and a tariff payment is made subsequently, then the FYA will be withdrawn by means of an assessment or an amended assessment.
17.This change will apply to expenditure incurred on or after 1 April 2012 for businesses within the charge to corporation tax, or 6 April 2012 for businesses within the charge to income tax. However, because the RHI tariff rate for ‘renewable’ combined heat and power (CHP) will not be finalised until after April 2012 FYAs will continue to be available for expenditure incurred on renewable CHP until 31 March 2014 for businesses within the charge to corporation tax and 5 April 2014 for businesses within the charge to income tax, even when RHI tariffs are paid.
18.Expenditure on solar panels incurred on or after 1 April 2012 (by businesses within the charge to corporation tax) or 6 April 2012 (by businesses within the charge to income tax) will be designated as special rate so that it attracts the lower rate of WDA. Capital allowances are intended to provide tax relief that broadly reflects average rates of economic depreciation, so special rate is considered to be the appropriate rate of WDA for these assets. Expenditure on solar panels is being specifically designated as special rate to ensure clarity of treatment for business. The rate of WDA appropriate for expenditure on other plant or machinery that generates electricity or heat that attracts FITs or RHI tariffs will be determined on the facts by applying the normal rules for plant and machinery allowances.
