KNOWLEDGE
Capital Gains

John Gorse reveals how energy-efficient lighting can not only cut carbon emissions but also improve business cash flow thanks to Enhanced Capital Allowances

LEDs and other energy-efficient lighting not only reduce carbon emissions and cut your energy bills and running costs, they can also improve businesses cash flow and reduce initial installation costs with accelerated tax relief through the Enhanced Capital Allowance scheme.

What are Enhanced Capital Allowances? They have been with us for some time, although their application specifically to lighting is a more recent development. The Enhanced Capital Allowance (ECA) scheme encourages businesses to invest more freely in energy-saving products and systems that help reduce the carbon emissions that contribute to climate change.

Eligibility for relief

Certain types of energy-efficient lighting products are eligible for full corporation tax relief for capitalised lighting equipment under the ECA scheme for energy-saving technologies. White light LED has its own technology criteria and tax relief can be claimed on the cost of the LED lighting, lighting controls and some high-upficiency lighting systems. Also, some of the direct costs of installation and delivery can be included.

For lighting, ECA eligibility depends on the system’s performance. This is different to some other energy-saving technologies where specific products are deemed to qualify.

The Carbon Trust manages a list of approved technologies and promotes the ECA scheme on behalf of the government. Furthermore, claims for an ECA must come from the final owners of the equipment and agreement is reached between them and their Inland Revenue office. However, it is important that we all understand the basic principles and function of ECAs.

Business benefit

A successful ECA application can mean that businesses will be able to offset signi cant costs of an installation against taxable pro ts in the year of purchase. This, in turn, boosts cash flow. The easing of initial investment costs encourages adoption of energy-saving equipment. Also, businesses will benefit from reduced carbon emissions, increased efficiency and lower energy bills from the date the installation is completed – as well as a better quality of light when and where it’s needed.

Investing in lighting that consumes less energy and creates fewer carbon emissions can reduce whole life costs. It can often be tempting to opt for the lowest capital cost in terms of initial investment, however, such immediate cost saving can be a false economy when you consider life cycle maintenance and operating costs.

Refer to the boxes to see how the ECA scheme applies to some energy-saving lighting technologies.

The ECA claim can be made as part of your annual tax return. Expenditure on the provision of plant and machinery can include not only the actual cost of buying the equipment, but other direct costs such as the transport of the equipment to site, and some of the direct costs of installation. Clarity on the eligibility of direct costs is available from Her Majesty’s Revenue and Customs at eca.gov.uk/etl or etl.decc.gov.uk/etl.

Consultation and discussion

Remember, however, that just because you or other stakeholders think a project could be ECA-compliant it does not automatically mean that the local revenue of ce will agree. There may need to be consultation and discussion and ultimately there may be corporation tax and other similar issues that derail or delay an application.

So, despite the government’s intention to promote the uptake of carbon-reducing technologies and stimulate business by saving money, an ECA is not a box ticking exercise. It would be counterproductive if otherwise valid and worthwhile projects that would yield great benefit to businesses in themselves, foundered on the decision to grant or decline an ECA application.

It might be a more prudent approach to consider ECAs as further potential bene t or an additional bonus of upgrading to LED lighting with lighting controls rather than as a deciding factor in an investment.

New solid state lighting and controls will often pay for themselves in two to three years anyway and the payback efficacy increases with time as the cost of energy rises. The extra savings in carbon and increases in building ef ciency also mean that businesses future-proof themselves against potential building use from operating inef cient premises.

Manufacturers can help. Where the lighting solution quailfies, Philips will con rm that the productconforms to all the required standards andcriteria, either in the form of a data sheet or aletter.

This can be used to support your ECA claim, although the  nal award of tax relief will be at the discretion of your local tax office.

Talk to your Philips sales representative who can advise you on how your organisation can save energy, reduce costs and enhance business performance through lighting.

John Gorse is technical marketing manager and CPM gatekeeper at Philips Lighting UK.

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