For the first time, Chancellor of the Exchequer Gordon Brown proposes to use the tax relief system to encourage energy efficiency. How well will the proposed scheme work?
Under the Climate Change Levy, companies will be taxed on the energy they use. But what the Government takes with one hand, it aims to give back with the other, in theory at least. Businesses will be offered relief in a number of ways, including cuts in National Insurance contributions, and a proposed Enhanced Capital Allowance (ECA) scheme.

The ECA scheme builds on tax regulations which allow businesses to obtain tax relief – in the form of capital allowances – for investment in machinery and plant. This relief is normally given at a rate of 25% a year on the reducing balance basis, which spreads the benefit over a number of years. About 95% of the cost of the machinery or plant is relieved in eight years.

Enhanced capital allowances have been granted in other areas, but this is the first time they have been proposed for use to support energy efficiency. ECAs will allow businesses to take tax relief on the full cost in the first year, bringing forward the benefits of the relief so it can be set against profits early on.

A list of equipment and technology eligible for ECA relief has been produced – although claims can't be made until the 2001 Finance Bill has passed through parliament.

What's on the list?
The list of eligible technologies grew out of responses to a consultation document. Following analysis of the responses, the Chancellor proposed that the ECA scheme would support chp, boilers, motors, variable speed drives, lighting, refrigeration, pipe insulation materials and thermal screens.

The main criteria for equipment on the list is that it offers optimum environmental benefit and cost-effectiveness. It must also be innovative. Four specific areas for consideration are also outlined.

  • improving energy efficiency: by setting technological specifications above the standard.
  • promoting new technology: particularly those technologies which have entered the market, but have yet to gain market confidence.
  • increasing market penetration: there must be scope for an energy efficient technology to increase its relative share of the market.
  • correlation between demand and cost: ECAs should only be available on products where there is a reasonable expectation that the tax-supported cost will increase sales.
Will it work?
On the positive side, it already seems as though end-users are taking notice of the tax advantages. Alan Aldridge, executive director of the Energy Systems Trade Association (ESTA) says: "The interesting thing is that many finances directors are already saying, 'If it's not on the list, we're not considering the item'." Aldridge believes the ECA scheme will encourage people to look at energy efficient technologies. "It is a tax break which has caught the imagination of many people. The benefit people will get from it could be five to six per cent of the purchase price. For example, if you buy an ac motor it could cost £100. But a high efficiency motor might have a price tag of £106. The tax break brings the price of the more efficient motor back down, so people can afford it." There are potential problems with the list. Not all technologies have been included. The Inland Revenue aims to start with a manageable list, and to include new items each year.

Aldridge says that this could cause misinterpretation of the list. "People will have a tendency to look to the list first, and potentially disregard items which aren't on there, but which contribute to energy efficiency," he comments.

"We wouldn't want to knock what's on the list, but we don't want them to be seen as the only technologies available. For example, in terms of saving energy, it might be better to have a control system or bems." Tax breaks are a powerful tool, and the government has caught the attention of buyers. The danger is that unless end users can be educated, some tools for energy efficiency may be overlooked. This would be damaging for manufacturers and building services as a whole.

In the end it will probably come down to engineers to take the lead in ensuring that the right technologies are used at the right time, whatever the tax breaks. As Aldridge comments: "The tax break is a benefit, but not the final analysis."

Key features of the scheme

  • all businesses will be able to claim Enhanced Capital Allowances, regardless of size, industrial or commercial sector, or location
  • Enhanced Capital Allowances will permit the full cost of the investment in specified technologies to be relieved for tax purposes against taxable income of the period of the investment
  • the qualifying technologies will have to meet defined energy saving criteria. They will be published in a list, and the criteria will be reviewed on an annual basis
  • there are no territorial restrictions on manufacturers wishing to place their products on the list or the source of products
  • only investments in new and unused machinery and plant can qualify