The energy tax break

Rob Coppinger examines the new Enhanced Capital Allowances scheme for energy-efficient investment.

Last month, companies started paying the energy tax, or climate change levy. We are all familiar with the controversy: the barmy idea that recycling the revenue raised through reduced National Insurance contributions would leave it fiscally neutral – and how this has hit the manufacturing sector harder than services, which use less energy but employed more people.

In the run-up to the introduction of the tax though, the government revised its earlier stance, and accepted the principle that some of the proceeds of the tax should be used more directly to encourage energy efficiency. The result of that was the Enhanced Capital Allowance scheme, in force since April this year, and which applies when companies invest in approved energy efficient equipment.

Based on a scheme that was invented in the Netherlands nine years ago, and now adopted widely in Europe, it allows firms to write off the entire cost of such equipment against taxable profits for the financial year in which they make the investment – instead of the usual 25% annually.

The Treasury estimates industry will gain £70m from the scheme in the first year, rising to £130m in the second.

Popular plan

Legislation for the scheme was passed just before the election, and the list of approved equipment has now, after months of delays, been published. The plan has been popular, not least with equipment suppliers.

The centrepiece of the scheme, run by the DETR, is the Energy Technology Product List, the government-approved list of what equipment is eligible. The product list includes a searchable database of suppliers of motors, boilers, drives, refrigeration systems and other equipment that can be applied to saving energy.

You can view the full list on the official ECA website. But it is far from complete. When we checked earlier this week, there were still several categories with no, or very few, products included. If you were seeking a thermal screen, for example, you would be disappointed. No suppliers. Similarly, there were only a couple of companies offering flue gas economisers, and one offering condensate return schemes.

There are plenty of boiler manufacturers represented, and all the major drives manufacturers are on the list, which includes 49 products in its variable speed drives category.

Certain products, such as pipework lagging, or lighting, are not listed in detail, but investment will still qualify for the allowances if it satisfies certain criteria. Combined Heat and Power schemes are also eligible, provided they meet the DETR’s quality assurance criteria.

Nor is it just products that are eligible. Installation costs, some consultancy fees, and modifications of buildings to house new equipment will also be eligible.

Some believe this should have gone further, to cover the cost of new buildings too. ‘This scheme is about reducing energy consumption, and while lights and boilers are covered the very fabric of the building has been ignored. It is a very short-term view,’ says Andrew Warren, director of the Association for the Conservation of Energy.

Warren also argues that eligibility for the enhanced allowances should have been restricted to companies paying the full climate change levy, rather than making it available also to those industry sectors which have negotiated 80% discounts in return for energy reduction.

Equipment suppliers probably don’t care either way, and more are expected to join the listing over the coming months.

Companies can apply for inclusion through the website, and since the government wants to expand the scheme, equipment which is not eligible at the moment could be included in the future. Merlin Hyman, director of the Environmental Industries Commission, which represents suppliers and consultants in this sector, says the list ought to eventually move towards ‘a broader systems approach, including management practices, and involving certification for approval.’

Quality assurance tests

Criteria for inclusion are set by the Carbon Trust, a not-for-profit company which was set up earlier this year to encourage the development of low carbon emitting technologies in the UK. The Trust will be carrying out quality assurance for the DETR by testing products on the list to ensure that they meet criteria.

The government has defended its attempts to recycle the CCL revenues through National Insurance as a bid to protect jobs. It now looks as though recycling the tax through measures like the enhanced allowances scheme, specifically aimed at improving energy efficiency, is the way the chancellor should have gone from the start.

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