The Carbon Trust is an independent not for profit company set up by the Government with support from business to ‘take the lead on low carbon technology and innovation in this country, and put Britain in the lead internationally’ (Tony Blair).

What is a Capital Allowance?

Currently businesses may obtain tax relief, in the form of capital allowances, for their investment in machinery and plant.

Companies pay 30% corporation tax on the profits they make (SMEs pay 40% in the first year followed by 25% a year)

The normal capital allowance rate is 25% a year on the reducing balance basis which spreads the benefit over a number of years (about 95% of the cost is relieved in 8 years).

With the Enhanced Capital Allowance companies can reduce the taxable amount by 100% in the first year.

EXAMPLE

Company X has profits of £100,000, and spends £10,000 capital on a new heating system.

• If there was NO capital allowance of any sort, they would pay 30% tax on their total profits (@ 30% = £30,000).  

• With a standard capital allowance they can reduce the taxable amount by 25% of £10,000 in the first year (£2,500), meaning they pay tax on £97,500 (@ 30% = £29,250) in the first year. GIVING A TAX SAVING OF £750. This continues year by year at 25%. of the outstanding balance.

• With an ENHANCED CAPITAL ALLOWANCE the company can reduce the taxable amount by 100% in the first year, meaning they will pay tax on £90,000 (@ 30% = £27,000) instead of tax on £97,500 (@30% = £29,250) in the first year.   GIVING A TAX SAVING OF £2250 – much greater than with the standard capital allowance