Enhanced Capital Allowance (ECA) are a tax relief given through the tax system by reducing  the taxable profits of the business. The ECA scheme builds on existing  statutory provisions, under which businesses may obtain tax relief, in the form  of capital allowances, for their investment in plant and machinery. Capital allowanceallow the costs of capital assets to be written  off against a business's taxable profits. They take the place of depreciation  charged in the commercial accounts which is not allowed for tax. The main  rate of allowance for plant, air conditioning and machinery is 25%  a year on the reducing balance basis, which spreads the benefit over a number of  years (about 95% of the cost is relieved in 8 years). ECA have been  granted in other areas before but this is the first time that they have been  introduced for use to support energy efficiency. ECA enable  businesses to claim 100% first-year capital allowanceon their investment in  designated energy-saving plant and machinery in the year in which the  expenditure is incurred. ECA bring forward relief, so that it can be set against  profits of a period earlier than would otherwise be the case.

The  benefit to businesses of ECA is thus a cash flow boost resulting from the  reduction of the business's tax bill of the year in which the investment is  made.

Capital  Allowance can be claimed on capital expenditure incurred on the  provision of plant and machinery for use in a business's trade. It is a  requirement of the legislation that as a result of incurring the expenditure the  machinery or plant belongs to the person making the claim.

Some  assets will not qualify for ECA. These include assets that are buildings or  structures as defined by sections 21 to 23 Capital Allowances Act 2001 as these  assets do not qualify for plant and machinery capital allowances.

How to Claim for ECA

Claims for ECA are made in the same way as other capital allowanceon the Corporation Tax Return for companies and the Income Tax Return for  individuals and partnerships.

The Inland Revenue's guidance on the ECAscheme can be found at www.inlandrevenue.gov.uk/capital_allowances/eca-guidance.htm.

The  Inland Revenue administers claims for ECA and they have wide-ranging powers to  investigate any aspect of the return. If errors are identified, any tax  underpaid may be recovered with interest and, in cases of negligent or  fraudulent conduct, penalties. Penalties cannot exceed 100% of the tax that  would otherwise have gone unpaid.

Claims  must be based on the costs incurred. Where you have purchased a qualifying Product that is not already incorporated into a larger item of plant and  machinery you must use the price paid for the item as the base of your claim. If  you have purchased a qualifying product which is incorporated into a larger  piece of equipment, the eligible claim value is provided in the Claim Values  section of this site. The remainder of the equipment can attract capital  allowances at the normal (rather than the Enhanced) rates.

The  words on the provision of machinery or plant in the Capital Allowance Act are  interpreted narrowly and exclude remote or indirect expenditure. Some common  types of cost are detailed below:

• · Direct  transportation and installation costs can be regarded as expenditure on the  provision of plant or machinery. These can include, for example, the costs of  transport, crainage costs to lift machinery in to place, project management  costs, installation, modifications to existing plant and machinery, and commissioning.
• · Professional  fees qualify only if they are directly related to the acquisition and  installation of assets that are plant or machinery. Fees incurred on such things  as feasibility studies or design work are generally too remote from the  acquisition and installation to qualify. The eligibility of such costs is  a question of fact based on the particular circumstances of the  case.
• · Costs  of alteration to an existing building arising as a direct result of the installation of qualifying plant and machinery may be  eligible for ECA.