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This relief has been given as an incentive taxpayers to invest in new energy and water saving technologies. A 100% allowance is claimable in the year of expenditure for capital expenditure in new (not second hand) technology, which saves energy and water and which also has been approved by the Department of Energy and Climate Change. This first year allowance is commonly referred to as Enhanced Capital Allowances (ECA’s).
ECA’s are available on expenditure on new assets and are not generally available on the purchase of a second hand property, with the exception of a new property. The exception to this rule is for new property where the technology installed is new and unused.
The 100% allowance means that the entire cost of these assets can be offset against the taxable profit in the year the expenditure was incurred. This provides a significant cash flow advantage for an investor, as a basic rate taxpayer or company will in effect be able to recover 20% of their outlay as a tax saving, whilst a higher rate taxpayer will be able to recover 40% in the first year. In some situations a tax credit of 19% may be payable from HMRC.
There are a number of different technologies for which this 100% relief can be claimed and the list is constantly changing. In addition, each of the qualifying technologies has a list of criteria, which must be met; otherwise the taxpayer will not be able to claim the 100% first year allowance.