Budget Notes

BN14 CAPITAL ALLOWANCES: INTRODUCTION OF FIRST-YEAR TAX CREDITS

Who is likely to be affected?

1. Companies within the charge to corporation tax that make a loss in a period in which they invest in certain designated energy-saving or environmentally-beneficial plant & machinery.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to enable loss-making companies to surrender losses attributable to 100 per cent first-year allowances (enhanced capital allowances) on designated energy-saving or environmentally-beneficial plant and machinery in exchange for a cash payment (a first-year tax credit) from Government. This change is part of the business tax reform package announced in Budget 2007.

Operative date

3. Companies will be able to claim first-year tax credits in respect of qualifying expenditure incurred on or after 1 April 2008.

Current law and proposed revisions

4. Section 52 of the Capital Allowances Act 2001 (CAA) entitles a person to claim a first-year allowance (FYA) in respect of qualifying expenditure on plant and machinery, the rate of which depends on the type of expenditure. Enhanced capital allowances (ECAs) are 100 per cent FYAs available to businesses that invest in certain qualifying 'green' plant and machinery.

5. The effect of a 100 per cent FYA is that the full cost of the plant and machinery incurred in a period may be deducted in computing the taxable profits of a business for that period. The new rules will expand this ECA regime and allow companies within the charge to corporation tax to surrender tax losses attributable to certain ECAs for a cash payment from Government (a first-year tax credit).

6. A company will be able to surrender tax losses from a trade, an ordinary property business, an overseas property business, a furnished holiday lettings business or from managing the investments of a company with investment business. The losses that may be surrendered will be those attributable to ECAs claimed on energy-saving (as defined in section 45A of CAA) or environmentally-beneficial plant and machinery (as defined in section 45H of CAA). Plant and machinery attracts ECAs if it appears on one of the product or criteria lists issued and maintained by the Secretary of State for Department for Environment, Food and Rural Affairs (Defra).

7. A company will receive a first-year tax credit of 19 per cent of the loss surrendered, although this is subject to an upper limit. The upper limit of the tax credit will be the greater of:

•    the total of the company's PAYE and National Insurance Contributions (NICs) liabilities for the period for which the loss is surrendered; or

•    £250,000.

8. A loss may only be surrendered for a first-year tax credit if it has not been otherwise relieved. Where the loss could be used by the company to off-set its own other taxable profits in the same period or surrendered as group relief then it may not be surrendered for a first-year tax credit. Any losses available to carry forward will be reduced by the amount of the loss that has been surrendered under the new rules.

9. A company must claim first-year tax credits in a return or amended return.

As part of the claim a company must provide:

•    a description of the ECA qualifying plant and machinery; and

•    the amount of expenditure on this plant and machinery; and

•    the date on which the expenditure was incurred. Where the plant and machinery is of a type that requires certification by Defra under section 45B or 45I of CAA in order to qualify for ECAs then the certificate must also be enclosed with the claim.

10. The new rules will contain a mechanism for clawing back first-year tax credits when the ECA qualifying plant and machinery is sold within the claw-back period. This period begins on the date the expenditure was incurred and ends four years after the end of the period for which the tax credit was paid.

11. A Payable Enhanced Capital Allowances technical note was issued on 17 December 2007 and is available on HM Revenue & Customs website.

Further advice

12. If you have any questions about this change, please contact Sue Pennicott on 020 7147 2627 (e-mail: sue.pennicott@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk