A higher standard of energy-saving

Capital allowances enable businesses to write off the capital cost of purchasing plant and machinery, for example equipment such as cars, computers, boilers and motors, against their taxable profits. They take the place of depreciation charged in commercial accounts.

The general rate of capital allowances is 25% a year on a reducing balance basis. For example, if a business spent £1,000 on a new solar thermal system, it could claim capital allowances of £250 (25% of £1000) against the taxable profits of the period of investment. Assuming the company pays corporation tax at 30%, the effect of the capital allowance for spending on the boiler in the period of
investment would be to reduce the business’s tax bill by £75 (£250 @ 30%).

The unrelieved balance of £750 (£1,000 less £250) is carried forward for relief against profits of later years. In this way the spending is written off over a number of years. If, however, the business invested the same amount in a high efficiency solar thermal system from the Energy Technology Product List, such as the Max-Tec Series, it could claim a 100% first-year capital allowance of £1,000 against the taxable profits of the year of investment.

Again assuming the company pays corporation tax at 30% the effect of the first-year allowance would be to reduce the business’s tax bill by £300 (£1,000 @ 30%). Thus, the first-year allowance can confer a cash flow advantage.

The 100% first-year capital allowance relieves all the qualifying spending. Therefore there is no unrelieved spending to carry forward against profits of later years.