In the final part of a three-part series, this article focuses on capital allowances and accelerated capital allowances (ACA).
Capital allowances are amounts a business can deduct from its profits for qualifying capital expenditure before calculating its overall tax liability (income/corporation tax). As depreciation isn’t allowable for tax, capital allowances compensate for this.
Capital allowances are available where the provisions of Section 284 TCA are met. A person carrying on a trade must incur capital expenditure on the provision of machinery or plant for the purposes of that trade.
Section 285A Taxes Consolidation Act, 1997 ('TCA') provides for accelerated capital allowances in respect of expenditure incurred by taxpayers on certain energy-efficient equipment bought for the purposes of their trade.
ACA is based on the existing capital allowances tax structure or wear and tear allowance, for plants and machinery. Claiming the ACA is carried out the same way as for the standard capital allowances.
Organisations who invest in eligible energy-efficient capital equipment can deduct the full cost of the equipment from their profits in the year of purchase. This reduces the taxable profit in year one by the full cost of the equipment.
The main features of the scheme are as follows:
• Capital allowances of 100 per cent are available in the year in which expenditure on qualifying equipment is incurred;
• To qualify, the equipment must meet certain energy-efficiency criteria (laid down by the Minister for Communication, Energy and Natural Resources) and be specified on a list of approved products. SEAI is responsible for maintaining the list; and
• Energy-efficient equipment on the list will fall into one of 10 designated classes of technology. Expenditure must be above a certain minimum amount to qualify for the increased allowance. These classes of technology are listed in the Table in Schedule 4A TCA 1997 (see table below).
The energy-efficient equipment must satisfy the following criteria:
• The equipment must be new;
• It must be acquired for the purposes of the trade;
• It must be wholly and exclusively so used for the purposes of the trade;
• It must be in use at the end of the chargeable period for which the allowances are claimed;
• It must meet specified energy-efficient criteria;
• It must fall within specified classes of technology listed in Schedule 4A TCA; and
• It must have met the minimum expenditure limits for each class of technology.
Energy-efficient equipment that is machinery or plant but that has not been approved can avail of the normal wear and tear allowances (12.5 per cent over eight years).
The accelerated capital allowance regime is a wide ranging application and therefore all companies should consider their capital expenditure position.
There is a significant opportunity for companies across all industries to improve their tax positions by availing of the accelerated capital allowance regime for energy-efficient equipment.
Accelerated allowances are only available to companies who incur expenditure on approved energy-efficient equipment for use in their trade.
It is important to note that where companies have not registered their equipment of choice and even though the equipment has energy-efficient characteristics, they lose out on the opportunity to avail of accelerated capital allowances.
The equipment must be owned by the company. Equipment that is leased, let or hired will not qualify for the allowance. Early consideration of the proposed capital spend prior to the accounting year end is vital to determine if you will be in a position to claim ACAs.
One of the major difficulties of the accelerated capital allowances initiative is the level of detail a claimant company must go into in order to ensure that the products they are claiming for are listed on the SEAI website.
For a small scale project or a once-off purchase of a specific piece of plant/machinery, this is pretty straightforward.
However, the difficulty arises when there is a large project whereby an engineering company is employed to construct the required development which contains thousands of different components each of which will need to be cross-checked against the SEAI website in order to ensure that they are qualifying for ACAs.
Given the increased focus on climate change and Ireland’s carbon footprint, it is important to ensure that companies are encouraged to purchase energy efficient equipment and provide an easier medium by which they can claim this valuable tax incentive.
This article is the third of a three-part series of articles focusing on tax and engineering. It is derived from material delivered by Grant Thornton to students taking the Innovation and Knowledge Management module in the School of Mechanical and Design Engineering TU Dublin. This article focused on capital allowances and accelerated capital allowances (ACA). The first article looked at research and development (R&D) tax credits and the second article at the knowledge development box (KDB).
Author: This series of articles was written by Bernard Doherty BE MIEI, James Mc Mahon BAgrSc and William Coffey BAgrSc of Grant Thornton and Gerard Nagle BE MIEI and Dr Kevin Delaney CEng FIE of TU Dublin.