Accelerated returns

Accounting & Business
June 2010

Crona Brady outlines the opportunities that accelerated capital allowances present for the purchase of energy-efficient equipment.

The Finance Act 2008 introduced a new section into the Tax acts to provide for accelerated capital allowances in respect of expenditure by companies on certain energy-efficient equipment. The new scheme will run for a trial period of three years, S285A TCA 1997 contains the relevant provisions.

A list of equipment eligible under the scheme is maintained by the Sustainable Energy Authority of Ireland (SEAI). The list can be found on their website www.seai.ie. This website also contains additional useful information on suppliers of the products, etc.

Capital allowances
Capital allowances should be available provided that provisions of s284 TCA 1997 are satisfied as follows:

• A company carrying on a trade must incur capital expenditure on the provision of machinery or plant for the purpose of that trade;
• The machinery or plant must belong to that person;
• The machinery or plant must be in use at the end of the chargeable periods for which the allowances are carried; and
• While the machinery or plant is used for the purpose of the trade, it must be wholly and exclusively so used.

Certain items listed on the register maintained by the SEAI may not be normally regarded as machinery or plant. It should be noted that the only requirement to avail of accelerated allowances on energy efficient equipment is that the product is approved and listed in the register maintained by SEAI. There is a minimum threshold spend level on specified types of products and these threshold levels are indicated on the SEAI website.

How it works
Normal capital allowances on plant and machinery is available at 12.5% per annum on a straight line basis (i.e. over an eight year period). In the case of approved energy-efficient equipment, the entire allowance can be claimed in the first year in which the equipment is provided and used for the company’s trade. It is important to note that the equipment must be in use for the purposes of the trade at the end of the chargeable period i.e.…the mere purchase of equipment is not sufficient.

The balancing allowances/balancing charge provisions of s288 TCA 1997 apply as normal. Where, for example, the equipment is sold, there may be a claw back of the allowances already granted. The quantum of the claw back will be dependent on the proceeds received for the sale of the equipment.

It is important to note that only companies can qualify for relief. The relief is not available to individuals or partnerships or other unincorporated bodies.

The relief is claimed on the corporation tax return for the company for the period in which the expenditure was incurred.

Example
Consider an example where a company has €200,000 profit at the end of the accounting period, on which they must pay corporation tax at a rate of 12.5%. The company had purchased capital equipment totalling €40,000 during the same period.

In the table below a number of key scenarios are compared.