AIA tax reliefs falling from JanuaryNovember 27, 2015
Also featured in November’s edition of The Courier Business Matters magazine.
Business Owners Should Act Now to Save on ‘New’ Energy
Energy costs can be a significant financial burden for business owners and many will be considering means of cutting these overheads.
One option would be to introduce energy technology such as wind turbines, solar panels and biomass boilers.
Whilst the cost of installing energy technology can be expensive, tax breaks are available for businesses to reduce such costs. However, business owners need to move fast to gain maximum benefit as from January 2016 tax relief on such investment is set to fall.
Wind turbines and solar panels qualify as plant and machinery for capital allowances purposes meaning the annual investment allowance (AIA) would be available. AIA effectively reduces the taxable profit by the amount of expenditure incurred. It is available for qualifying expenditure on plant and machinery but is capped at £500,000. From 1 January 2016, the cap will fall to £200,000 with the annual maximum being an apportioned amount based on your accounts year end.
Businesses considering high capital expenditure should be aware that the rate will fall in January and ensure they fully utilise the AIA available.
With some installers of wind turbines or solar panels guaranteeing a useful life of over 25 years, care should be taken to ensure all expenditure is covered by the AIA. Where the AIA is exceeded and the useful life is more than 25 years, the excess will be included in a long life asset pool where the writing down allowance (WDA) is 8%. Expenditure for assets with a useful life of less than 25 years benefits from 18% WDA.
Care also needs to be taken to identify any installation costs, such as building roads and concrete structures, as they would not qualify for capital allowances. Where there is private usage of the energy technology, capital allowances should be adjusted accordingly.
Any income generated by a business from selling unused power to utility suppliers (feed-in-tariffs) is taxable as income. Businesses will hope to make a reasonable return from what can be a very expensive asset to install and therefore need to be aware of the tax payable.
Given the tax reliefs available on expenditure, and the taxation of feed-in-tariffs as income, consideration regarding the best ownership structure for wind turbines should not be overlooked.
Wind turbines generate energy and are not energy saving, therefore, they do not qualify for enhanced capital allowances (ECAs). However, certain energy saving technology, such as biomass boilers, may qualify for enhanced capital allowances of 100%. A list of qualifying energy saving technology can be found at: https://www.gov.uk/guidance/energy-technology-list.
ECAs are separate from AIA, meaning if the full AIA is utilised in the year, ECAs would still be available for the cost of a qualifying biomass boiler. Where tariff payments, or income under the renewable heat incentive are received in respect of energy saving technology, ECAs may not be available. However, subject to the annual maximum, AIA would still be available. Other capital expenditure should not be overlooked to ensure full use of the AIA maximum where ECAs are not available.