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CLAUSE 65 AND SCHEDULE 17: ENERGY-SAVING PLANT AND MACHINERY

SUMMARY

1.      This Clause and Schedule provide for 100 per cent first year allowances (“FYAs”) for expenditure incurred on or after 1 April 2001 on designated energy-saving technologies and products.

2.      The scheme aims to encourage businesses to invest in energy-saving plant and machinery through the cash-flow benefits offered by 100 per cent FYAs. Provision is made for the qualifying energy-saving technologies and products to be included in lists issued by the Secretary of State for the Environment, Transport and the Regions. The scheme excludes equipment, including components, that do not qualify for FYAs under existing schemes such as assets acquired for leasing or letting on hire, and cars, sea-going ships and long-life assets.

3.      The scheme forms part of a wider package of measures to help businesses reduce their energy use and so help the UK reduce emissions of greenhouse gasses.

DETAILS OF THE CLAUSE

4.      Clause 65 gives effect to Schedule 17 for chargeable periods ending on or after 1 April 2001 for the purposes of corporation tax and for chargeable periods ending on or after 6 April 2001 for income tax. The schedule contains the rules that set out the conditions for obtaining 100 per cent FYAs for expenditure on energy-saving plant or machinery.

Schedule 17 – First year allowances in respect of energy-saving plant and machinery

5.      Paragraph 1 adds expenditure on energy-saving plant or machinery to the list of the types of expenditure that can qualify for FYAs in Section 39 Capital Allowances Act 2001 (“CAA 2001”). 

6.      Paragraph 2 inserts three new sections 45A, 45B and 45C into CAA 2001. They contain the main rules governing the FYAs.

7.      Section 45A defines the qualifying expenditure and energy-saving plant and machinery.

8.      Subsection (1) of Section 45A sets out the key conditions to be met before expenditure on energy-saving plant and machinery can qualify for FYAs.  The expenditure must be on new and unused plant or machinery, it must be incurred on or after 1 April 2001, and it must not be excluded by any of the general exclusions set out in Section 46 CAA 2001, such as on assets for leasing or letting on hire or long-life assets.

9.      Subsection (2) sets out what is meant by energy-saving plant or machinery.  It is plant or machinery which, at the time the expenditure is incurred or the contract for its provision is entered into satisfies the conditions in subsection (3).

10. Subsection (3) sets out these conditions.  The plant or machinery must be of a description specified in a Treasury order, and must satisfy the relevant energy-saving criteria specified by the order.

11. Subsection (4) allows the Treasury order to identify the qualifying plant and machinery by reference to lists of technologies or products issued by the Secretary of State (for the Environment, Transport and the Regions).

12. Section 45B deals with cases in which require a certificate of energy efficiency.

13. Subsection (1) allows the Treasury order mentioned in Section 45A(3) to prevent the making of the 100 per cent FYAs in specific cases unless a certificate of energy efficiency is in force.

14. Subsection (2) defines a certificate of energy efficiency as one that certifies either that a particular item of plant or machinery or, where appropriate, plant or machinery constructed to a particular design, meets the relevant energy-saving criteria.

15. Subsection (3) provides that certificates of energy efficiency are those issued by the Secretary of State.  Certificates may also be issued or in the case of plant or machinery used, or for use in Scotland, Wales or Northern Ireland, by the respective devolved assembly. These persons or bodies can also authorise other persons to issue certificates.

16. Subsection (4) contains provisions that apply if the certificate for energy efficiency is revoked. A certificate that is revoked is treated as if it had never been issued. The subsection provides for the making of all assessments or amendments to assessments that may be necessary as a consequence of the revocation.

17. Subsections (5) and (6) require a person who has made a return and who becomes aware that the return has become incorrect as a result of the revocation of a certificate of energy efficiency to give notice to Inland Revenue of the amendments that are required within 3 months of becoming aware.

18. Section 45C deals with the cases in which the plant or machinery that can qualify for the 100 per cent FYAs is part of a larger item of plant or machinery which does not qualify for the allowance.

19. Subsections (1), (2) and (3) limit the expenditure on the larger item plant or machinery that can qualify for the 100 per cent FYAs (“section 45A expenditure”) to an amount specified by the Treasury order mentioned in Section 45A(3) for the particular component, or if there is more than one component, the total of the amounts specified for each component.

20. Subsection (4) deals with cases in which payments for plant or machinery containing components that qualify for 100 per cent FYAs are made in instalments. The proportion of each instalment that qualifies for 100 per cent FYAs equals the proportion the total qualifying expenditure bears to the whole expenditure on the plant or machinery.

21. Subsection (4) disapplies the normal apportionment rules in Section 562(3) that would otherwise apply in this situation.

22. Subsection (6) defines the references in Section 45C to “section 45A expenditure”, as the expenditure that qualifies for the 100 per cent FYAs through section 45A.

23. Paragraph 3 adds expenditure on energy-saving plant or machinery to the list of provisions to which the general exclusions in Section 46 CAA 2001 apply.  These rules prevent certain expenditure from ever qualifying for FYAs, such as expenditure on assets for leasing or letting on hire, or long life assets.

24. Paragraph 4 adds expenditure on energy-saving investments to the list in Section 52(3) CAA 2001 of the types of expenditure that qualify for FYAs, and sets the rate of the FYAs at 100 per cent.

25. Paragraph 5 provides for a penalty to be exigible if the person fails to provide the information required under Section 45B(5) and (6) following the revocation of a certificate of energy efficiency.

26. Paragraph 6 contains transitional provisions. It permits expenditure incurred from 1 April 2001, to qualify for 100 per cent FYAs, even though it is incurred before the making of the Treasury order specifying the plant or machinery that is qualifying energy-saving plant or machinery.  The Treasury order cannot be made until after this legislation takes effect. Paragraph 6 works by treating the plant or machinery as meeting the conditions at the time the expenditure is incurred or the contract for the expenditure entered into if it would have met the conditions in the first Treasury order had it been in made at that time.

BACKGROUND NOTE

27. Capital allowances allow the cost of capital assets to be written off against the taxable profits. They take the place of depreciation charged in the commercial accounts, which is not allowed for tax.

28. Capital allowances are generally given on plant and machinery at 25 per cent a year on the reducing balance basis. Small and medium-sized businesses can claim 40 per cent FYAs on plant and machinery generally, and small businesses can claim 100 per cent FYAs on their investments between 1 April 2000 and 31 March 2003 in information and communications technology.  There are also special rules which allow expenditure on plant and machinery with a life of less than 5 years (short-life assets) to be written off more quickly.

29. The UK is committed to reducing greenhouse gasses under the international Kyoto Protocol, which will help the EU reach its target.  The UK also has a domestic target of a 20 per cent reduction in carbon emissions.  The UK is thus introducing a range of measures to encourage the reduction in emissions.  They include the Climate Change Levy, a new framework for emissions trading, and the creation of the Carbon Trust to provide energy advice, promote low-carbon technologies and assist with long-term sustainable development.