Capital Allowances for Energy-Efficient Equipment

Introduction

Section 46 Finance Act, 2008 (now Section 285A TCA, 1997) introduced a new incentive for the provision of certain energy-efficient equipment for use in a company’s trade. The equipment must be approved and listed by the Minister for Communications, Energy and Natural Resources. Accelerated capital allowances of 100% of the capital expenditure incurred can be claimed for the year in which the equipment is provided and used. The new scheme will run for a trial period of 3 years.

Capital Allowances

Capital allowances in the form of wear and tear allowances will be available where the provisions of Section 284 TCA, 1997 are met as follows:

• A person carrying on a trade must incur capital expenditure on the provision of machinery or plant for the purposes 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 period for which the allowances are claimed;
• While the machinery or plant is used for the purposes of the trade, it must be wholly and exclusively so used.

Because of the possibility that the approved energy-efficient equipment might not be regarded as machinery or plant in its own right for the purposes of wear and tear allowances, any products that have been approved and listed are deemed to be machinery or plant.

Wear and tear allowances for machinery or plant are generally given over an 8-year period at an annual rate of 12½% of the capital expenditure incurred. In the case of approved energy-efficient equipment, this rate is accelerated and the entire allowance can be claimed in the first year in which the equipment is provided and used for the company’s trade. Energy-efficient equipment that is machinery or plant but that has not been approved and listed can, of course, avail of the normal wear and tear allowances.

The normal rules regarding balancing allowances/charges in Section 288 TCA, 1997 apply. Where certain ‘balancing’ events occur, for example, the sale of the equipment or its ceasing to be used for the purposes of the trade, additional wear and tear allowances may be due, or there may be a clawback of the allowances already granted. This will depend on the proceeds or value of the equipment (or deemed proceeds/value) at the time of the event.

Who can qualify for the incentive?

The normal wear and tear allowances can be claimed by both individuals and companies. However, the new accelerated allowance is only available to companies who incur expenditure on approved energy-efficient equipment for use in their trade. The equipment must be owned by the company. Equipment that is leased, let or hired will not qualify for the allowance.

Qualifying period

The scheme will run for a trial period of three years from the date on which the Minister for Communications, Energy and Natural Resources made the first Order to establish the list of approved energy-efficient equipment. This Order (S.I. 399/2008) was made on 9 October 2008.

However, expenditure that is incurred on equipment on or after 31 January 2008 will qualify for the incentive if that equipment is subsequently on the approved list.

The scheme itself also came into operation on 9 October 2008 when the Minister for Finance made the required Commencement Order.

The scheme itself also came into operation on 9 October 2008 when the Minister for Finance made the required Commencement Order.

The energy-efficient equipment must be new. It must meet specified energy-efficient criteria and must fall within three specified classes of technology. These criteria and classes of technology have been determined by the Minister for Communications, Energy and Natural Resources. The Minister will approve items of equipment within each class that will be eligible under the scheme and will publish these on a list. The Minister can, by Order, amend the list of approved items after the initial list has been published. The list of approved items will be maintained by Sustainable Energy Ireland and will be available at www.sei.ie. A company is required to incur a minimum amount of expenditure on providing the equipment and this varies with the particular class of technology to which the equipment belongs. The classes of technology and their corresponding energy-efficient criteria and minimum expenditure limits are set out in the table below.

The Finance (No. 2) Bill 2008, as initiated, contains a provision in section 33 to extend from 3 to 7 the categories of energy-efficient equipment to be included in the scheme.

The proposed new categories are:

• Information and Communications Technology
• Heating and Electricity Provision
• Process and Heating, Ventilation and Air-conditioning (HVAC) Control Systems
• Electric and Alternative Fuel Vehicles

These proposed new categories will not become effective until the Finance (No. 2) Bill 2008 is passed into law and the Minister for Finance makes the required Commencement Order. In addition, the Minister for Communications, Energy and Natural Resources will have to make a new Order listing the approved items within the new categories. The Finance (No. 2) Bill 2008, as initiated, does not extend the initial trial period of 3 years.

How relief is claimed

There is no requirement to obtain approval for expenditure on the energy-efficient equipment. The normal self-assessment provisions apply. Once a company meets all of the required conditions, it can claim the allowance for the accounting period in which the equipment was first provided and used for its trade provided that the equipment is included on the published list at some stage during that accounting period. The allowance should be claimed on the company’s return of income (form CT1) and should be included along with any other wear and tear allowances for machinery and plant. The current form CT1 does not contain a dedicated entry for the new allowance but may do so in the future.