United Kingdom

UK-7:Enhanced Capital Allowance (ECA) Scheme

Policy Description

The Enhanced Capital Allowance (ECA) scheme is part of the Government’s programme to manage climate change [1]. The Government introduced the ECA scheme in 2001 to encourage businesses to invest in low carbon, energy-saving equipment. There are three schemes for ECAs: (1) Energy-saving plants and machinery; (2) Low carbon dioxide emission cars and natural gas and hydrogen refuelling infrastructure; (3) Water conservation plant and machinery. The scheme is managed by the Carbon Trust, on behalf of the Government.

Description

The Enhanced Capital Allowance (ECA) scheme is part of the Government’s programme to manage climate change [1]. The Government introduced the ECA scheme in 2001 to encourage businesses to invest in low carbon, energy-saving equipment. There are three schemes for ECAs: (1) Energy-saving plants and machinery; (2) Low carbon dioxide emission cars and natural gas and hydrogen refuelling infrastructure; (3) Water conservation plant and machinery. The scheme is managed by the Carbon Trust, on behalf of the Government.

The ECA provides businesses with enhanced tax relief for investments in equipment that meets published criteria. The criteria are published in the Energy Technology Criteria List (ETCL) and are reviewed (and where necessary revised) on an annual basis, to reflect best practice. Eligibility criteria are published for each technology and sub-technology. Also, the Energy Technology List (ETL) details the criteria for each type of technology, and lists those products in each category that meet them. New technology groups might also be added as part of the annual review, but they must have the approval of the Department of Energy and Climate Change (DECC), Her Majesty’s Revenue and Customs (HMRC) and the Treasury. Also, manufacturers of energy efficient equipment can use the criteria to aid product development by using the  Energy Technology Product List (ETPL).

Capital allowances permit the costs of capital assets to be written off against a business’s taxable profits, and first-year allowances (FYAs) is the name given to specially increased rates of allowances. FYAs allow for an increased proportion of the cost of an investment to qualify for tax relief against a business’s profits. The ECA scheme provides 100 per cent FYAs for spending on designated energy-saving technologies and products. This enables a business to write off the whole cost of the investment, which can provide a helpful cash flow boost. It is therefore an integral part of the Climate Change Agreements and the Climate Change Levy (CCL) package [2].

Policy Information Expand this section for information on the key features of the policy, such as its date of introduction, categorization, main objective(s) and linkages with other policies.

Policy Categorisation

Policy Instrument Type: Economic, Incentives & Subsidies

Position in the Pyramid

About Us

Participation: Voluntary

Period

Start Date: 2001

Policy Linkages

Supported By Pollution Prevention and Control (PPC) Act Supporting Measure
Supported By EU Emissions Trading System (EU ETS) Effort Defining

Agencies Responsible

Department of Energy and Climate Change
HM Revenue and Customs

Primary Objective: Energy

Objective

Stimulate investments in energy-efficient technologies and low carbon technologies

Target Group

In principle any company that pays UK corporation or income tax, regardless of size, sector or location.

Driver of energy consumption or emissions affected by policy: Technology implementation rate

Implementation Information Expand this section for information on targets, monitoring, verification and enforcement regimes, and implementation requirements and tools.

Coverage

Not applicable

Quantitative Target? yes

Target: Not applicable

Time Period: Not applicable

Progress Monitored? yes

Verification Required? yes

Enforced? no

Requirements on the Target Group

ECA claims should be submitted as part of the normal corporate or income tax return. It is important to retain all documents relating to the ECA claim, including invoices, dated screen prints from the ECA website and anything from the company that installs the equipment. HMRC may investigate any aspect of a tax return and the business should have all necessary evidence to hand to support its claim.

For a product to appear on the Energy Technology Product List (ETPL), and therefore qualify for an ECA claim, it must meet a set of energy-saving criteria. The criteria are published in an Energy Technology Criteria List (ETCL) [3] and are reviewed (and where necessary revised) on an annual basis, to reflect best practice. Eligibility criteria are published for each technology and sub-technology. This process is managed and coordinated by the Carbon Trust.

Support by Government

The Carbon Trust provides general guidance on how to claim tax relief through the ECA on its website. The website also provides access to the application forms. Furthermore the Carbon Trust annually updates the ETPL list. The Carbon Trust also provides project advice on energy saving projects to companies. Advice on how to apply for the ECA can be part of the project advice. Small and medium sized enterprises can borrow from £3,000 to £500,000 (Subject to eligibility and Regional variations apply) on an unsecured basis and payable over a period of up to four years (*2).

Implementation Toolbox

The most important tools providing support to the implementation of the Enhanced Capital Allowance scheme are the Energy Technology Criteria List and Energy Technology Product List. The lists provide potential applicants with an overview of the technologies that are eligible for tax-exemption but also have an important "attention value" as they highlight energy efficiency technologies for companies they did not know existed.

Complexity of Implementation

Government

The HMRC needs to review and approve each application for the ECA. This process is managed and coordinated by the Carbon Trust.

Target Group

The companies need to apply for the ECA and hand in evidence that they actually bought the equipment. No advanced monitoring is required.

Impacts, Costs & Benefits Expand this section to find information on policy effectiveness and efficiency.

Impact Quantitative Estimate Qualitative Estimate
Estimated effect on energy consumption or emissions The total amount of CO2 saved by purchases of all technologies (including CHP) covered by the ECA scheme was estimated as 1,700kT in the first year with lifetime savings for same assets estimated as 9,450kT [2] Care should be taken when interpreting these numbers: > It does necessarily not follow that any ‘real’ carbon savings were entirely attributable to the ECA scheme. There is overlap with the CCA, CCL and EU-ETS. > It must however be noted that it is estimated that 25% of the savings are achieved by ""free riders"" (i.e. these savings probably also would have been achieved in the absence of the financial incentive from the ECA). [2] Not applicable
Estimated costs/benefits for industry Not applicable Not applicable
Estimated cost for government Cost for managing the ECA scheme at the Carbon Trust Not applicable
Other Benefits
General Benefits Improves company’s energy-efficiency and its impact on the environment
Specific Benefits • Can bring significant financial savings, in the short and long-term; • Incentives for businesses to purchase energy-saving technologies [3]. • Realise a market transformation for energy efficient products

References & Footnotes

References

[1] The Enhanced Capital Allowance Scheme: http://www.eca.gov.uk/

[3] DECC (2012).Energy Technology Criteria List. July 2012. Available from: http://etl.decc.gov.uk/NR/rdonlyres/0204E079-CA04-4314-BB59-433919FD2B29/0/5701energytechnologycriterialist2012.pdf

[2] HMRC (2008). Experian, Evaluation of Enhanced Capital Allowance (ECA) for Energy Saving Technologies, 2008: http://www.hmrc.gov.uk/research/report-54.pdf

Footnotes

(*1) Financial claims per type of measure are monitored by the HM Revenues and Customs http://www.hmrc.gov.uk/index.htm. The website of the Carbon Trust states that "It’s important to retain all documents relating to your ECA claim, including invoices, dated screen prints from the ECA website and anything from the company that installs the equipment. HMRC may investigate any aspect of a tax return and you should have all necessary evidence to hand to support your claim".

(*2) Under the ECA scheme, businesses can claim an 'enhanced' 100% capital allowance on qualifying investments in equipment in the first tax year. Normal capital allowances on plant and machinery are 20% a year on a reducing balance basis. A company which pays 28% corporation tax would save an extra £224 for every £1,000 spent under the Enhanced Capital Allowances scheme in the purchase year, so the scheme boosts cash flow and shortens the payback period.