ATXP6 UK
Syllabus A1. Income tax A1d. Income from self employment

A1dv/A4ciii. Enhanced capital allowances

Syllabus A1dv/A4ciii)

Identify the enhanced capital allowances available in respect of expenditure on green technologies
and
Identify the enhanced capital allowances available in respect of expenditure on green technologies, including the tax credit available in the case of a loss making company

What are enhanced capital allowances?

Enhanced capital allowances

Expenditure  by  businesses  on  energy-saving  or  environmentally  beneficial plant and machinery qualifies for enhanced capital allowances (ECA) of 100%. 

These allowances are given in full if an accounting period is shorter than 12 months, they are not pro-rated. 

For example, if a company purchase an environmentally machine for £100,000, the enhanced allowance available for the machinery would be 100%*£100,000 = £100,000 ECA.

Trading losses

In an accounting year, if a company makes a trading loss and can also claim enhanced capital allowances in the same year, then the company can surrender part of its trading loss and receive a payment from HMRC. 

Payment from HMRC is two thirds of the corporation tax rate multiplied by the amount of loss surrendered.

For 2018/19 this will be 12.67% (two thirds of the corporation tax rate rounded up the nearest second decimal place)

How much loss can be surrendered?

This is the lower of:

  • The amount of the trading loss after using it in the current year against total income and group relief for trading losses.

  • The amount of the enhanced capital allowances (ECA).

Illustration

A company makes a trading loss. It has no associated companies. 

After relieving the trading loss against is total income for the year, there is still (£100,000) remaining. 

During the year, the company purchased environmentally friendly machinery for £50,000 on which ECAs could be claimed. 

How much of this trading loss can be surrendered to HMRC?

Solution

The lower of:
£100,000
£50,000 * 100% = £50,000

£50,000 can be surrendered. 

Repayment from HMRC:
£50,000 * 12.67% = £6,335

Trading loss carried forward:
Trading loss £100,000
Loss surrendered (£50,000)
Trading loss c/f £50,000