Cash-tax benefits when buying energy-efficient equipment

Investing in approved energy-efficient equipment can reap cash-flow dividends under the ACA scheme.

It’s not only IT firms that should be investigating whether they are eligible for specific capital allowances when they are purchasing energy-efficient equipment. According to Mark Gorman, director, Business Tax, Deloitte & Touche, companies of all sizes and in every sector in Ireland should be aware of the Accelerated Capital Allowance (ACA) scheme.

While capital allowances for plant or machinery are generally given over an eight-year period at an annual rate of 12.5pc of the capital expenditure incurred, he says with the (ACA) scheme – which is based on the existing capital allowances scheme for plant and machinery in line with the Taxes Consolidation Act 1997 (Section 285A) – when a company invests in approved energy-efficient equipment, it can deduct the full cost of the equipment from the taxable profit in the first year in which the equipment is provided and used for the company’s trade.

Cash-tax benefits

Gorman says the Government’s approach with the ACA scheme is to incentivise companies to opt for energy-efficient equipment, where possible, such as when they are buying a new specific type of energy-efficient server or are investing in new computer-based systems.

“There’s a cash-tax benefit. You get the use of that cash upfront as a company rather than getting a portion over eight years. It’s good for cash flow. While there is a cash tax benefit on any such investment, the more a company spends on energy-efficient equipment and the bigger the company’s tax bill, the bigger the cash-tax benefit,” he explains.

“However, as the deduction is allowed up front, there will be a benefit to any company making a purchase of energy-efficient equipment. Even if you’re a small SME operator, it also makes business sense.”

Companies should visit the Sustainable Energy Authority of Ireland (SEAI) website for a list of the criteria and classes of technology.

Making a claim

So how do companies go about making a claim?

Gorman says businesses should firstly log onto the SEAI website to make sure they are buying the specific type of qualifying energy-efficient equipment that’s listed there.

He says you should make the claim as part of your normal corporate tax return (Form CT1) at the end of your tax year, under the normal self-assessment system.

“It’s up to you as a company, in consultation with your tax adviser, to get that tax computation right.”

– If for instance you are buying a server, he says you should visit SEAI to check if the model you are buying is listed on its database of energy-efficient equipment.

– In addition, a company must be able to satisfy Revenue of its entitlement to the accelerated allowances in the case of a Revenue Audit, so Gorman’s advice is to retain every piece of relevant documentation, as well as evidence of the product being on the specified list during the accounting period.

Cash-tax benefits

Gorman gives the example of a company that has €50,000 taxable trading profit for the period ended 31 December 2009. This profit is taxable at a rate of 12.5pc. The company purchased capital equipment with a cost of €20,000 for the purposes of the trade in the same period.

If the company purchases  €20,000 worth of equipment that qualifies as approved energy-efficient equipment, Gorman says the company has €2,188 cash tax savings in year one under the ACA scheme, as the capital allowance deduction is given in full in the year the capital expenditure is incurred. In contrast, under the standard capital allowances scheme, the deduction is given over eight years.

He says the ACA’s for energy-efficient equipment can be claimed where:

– A person carrying on a trade incurs capital expenditure on energy-efficient equipment for the purposes of that trade

– The energy-efficient equipment belongs to the company – ie, it is not hired or let

– The equipment is in use at the end of the chargeable period for which the allowances are claimed

– The equipment is new and unused – second-hand equipment does not qualify

Finally, a company is also required to spend a minimum amount on the various classes of energy-efficient equipment.

Gorman says if you have a tax adviser and are about to make large capital purchases, perhaps talk to them before you that so they can guide you about potential tax benefits.

And while the ACA scheme has been running for a trial period and is set to finish in October 2010, he predicts that it will be extended given Ireland’s energy commitments for 2020.

The following table offers a basic list of the technology classes and the minimum amount companies need to spend to be eligible for the scheme. For more detailed information visit the SEAI website.