Tax Update - Environmental Incentives
Environmental Tax Incentives
Alongside a ‘greener’ planet and the obvious life cycle cost benefits of incorporating energy and water efficient technologies into buildings, generous tax incentives are available to encourage investment.
Through Enhanced Capital Allowances (ECA), investors and occupiers can enjoy 100% first year tax relief on a proportion of their property expenditure. Even if they are in the enviable position of having no tax to pay in a particular year, they may still be able to surrender the ECA for a cash credit from HMRC.
The qualifying technologies are very specific and have been chosen by the Government to promote the inclusion of certain assets into a building’s design. These are reviewed on an annual basis to add/remove assets or assess whether eligibility thresholds need to be increased to allow continual environmental improvement.
In 2018 the Government has, amongst other things, targeted two important elements of building design and sought to apply further upward pressure on efficiency - VRF air conditioning systems and lighting. Although both of these technologies have been within scope of the relief since its introduction in 2001 and have been the subject of revised criteria in the past, the latest changes potentially make it that little bit more difficult to comply. As both can represent a high proportion of the mechanical and electrical services costs within a building contract, being alive to the opportunities offered by ECA will obviously allow any associated tax saving benefits to be considered alongside the other capital and life cycle costs of property assets.
VRF (Variable Refrigerant Flow) Systems
We have seen a noticeable increase in their use in recent years which has meant more clients have been able to realise the associated savings. That said, in too many instances systems have just missed the criteria thresholds and manufacturers (commonly Mitsubishi, Daikin and Toshiba) have indicated that an ECA review pre-contract may have resulted in a more positive outcome. The latest changes have amended the parameters against which a systems performance is measured, potentially leading to a greater proportion of ineligible installations. More than ever, an early consideration of the type and configuration of indoor and outdoor units for each system will be important if tax savings/credits are to be optimised.
There has also been a very noticeable shift from fluorescent to LED luminaires over the last few years, to the extent that on many projects LEDs make up a majority of the luminaires employed. This has meant that many luminaires were exceeding the qualifying thresholds as a matter of course and the latest changes seek to push these up another level. As a consequence, the number of eligible light fittings may, for a while at least, be lower. That said, there are still plenty of current luminaires that will meet the new thresholds and consideration of the lighting ECAs during the design stage will allow the opportunity for these to be specified.
This article covers just two of the main technology areas where changes have been made recently. There are, however, other technologies that fall outside the scope of this article.
Please contact me or another member of our Construction and Property Tax team if you would like further information on these technologies. You can also visit our web page for information about our services.