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Business Tax  •  Green taxes

“Inoculate” your business and save on taxes with key green initiatives

By Lesley Stalker on 13 July, 2009

Much continues to be written about green businesses and the importance of corporate social responsibility (CSR).  Research has shown its importance for reputation management.  A study published in the Journal of Reputation Management showed clearly that firms who had a reputation for “doing good” bounced back much more quickly after an industry crisis compared with their less altruistic counterparts.  In effect, their CSR policies had an “inoculating effect”, creating a “reservoir of goodwill” among stakeholders.  In addition to the public relations benefits, the right strategy can also deliver a significant financial advantage as this article will highlight with an overview of the different green tax breaks relevant for small to medium sized businesses.

So called “green tax breaks” continue to be a slightly controversial topic because many people believe the government should be doing more to support businesses who want to practice green policies.  While other European countries are lauded for their foresight in this area, the UK continues to lag behind by comparison.  However, the recent Budget did make additional, albeit small steps in the right direction.

So what are the 4 key ways your business could benefit from its green policies?

1. Save tax by signing up to a Climate Change Agreement

Currently the Climate Change Levy, which is a tax on energy delivered to non-domestic users, rises each year in line with inflation.  The income raised from this tax is used to fund energy efficiency programmes, of which The Carbon Trust, a government-funded independent company that helps businesses cut carbon emissions, is one. If your business is energy intensive, for example, you run a printing firm or craft bakers; you can qualify up to 80% reduction on your Climate Change Levy by signing a climate change agreement.  As part of this, in return for paying less tax, you would commit to meeting set energy efficiency targets. The most straightforward way to find out about how this scheme might help your business is to contact your own sector association.

2. Interest free “green loans” of £5,000 to £100,000

What goes around usually comes around and the government is making some of the income it receives via the Climate Change Levy available to businesses in the form of interest free “green loans”.  Qualifying small businesses can apply for interest free loans of £5,000 to £100,000 from the Carbon Trust to replace or upgrade existing equipment and appliances with more energy efficient versions or install energy saving products such as insulation. Find out more at the Carbon Trust website which also provides resources to enable you to calculate your business’ carbon footprint.

3. Enhanced capital allowances (also known as 100% first-year allowances)

Enhanced capital allowances (ECAs) are available in addition to the existing Annual Investment Allowance (AIA) scheme.  ECA is a tax relief scheme for any company investing in new plant and machinery which is energy efficient and which qualifies as such under the HMRC’s guidelines.   Careful tax planning is required to ensure a business can take maximum advantage of the benefits.

Under the ECA scheme it is possible to obtain tax relief on the whole cost of the purchase in the same tax year.  ECAs are also available for businesses that invest in water saving equipment and on new cars with low carbon dioxide emissions.  Depending on your profit levels, taking advantage of ECAs can represent a significant tax benefit because the full cost of the asset can be written off in the first year of purchase.  In contrast with other acquisitions of plant and machinery dealt with under the normal AIA scheme, only the first £50,000 can be completely written off in the first year, with 40% of the remaining balance in year two and then 20% for subsequent years.  Additionally worth consideration, it is now also possible to defer applying for the associated ECA tax relief in accordance with HMRCs new delayed payment scheme, established for businesses facing difficulties during the current climate.  So in effect you may defer both the corporation tax payable and any corresponding use of the ECA.

ECA is not without its critics and one of the biggest criticisms about the scheme is that the qualification criteria are too prescriptive.  ECAs can only be claimed on specific types of energy-saving products that meet the relevant criteria for their particular technology group.  There are 14 categories of these which are updated each month and detailed on the Energy Technology Criteria List (ETCL) published by HMRC.  New technology groups might also be added as part of an annual review, but they must have the combined approval of DEFRA, HMRC and the Treasury.

The 14 groups detailed below currently qualify, together with 60 qualifying sub-technologies such as speed motors, or variable speed drives.

Air-to-air energy recovery, Automatic monitoring and targeting (AMT), Boiler equipment, Combined heat and power (CHP), Compact heat exchangers, Compressed air equipment, Heat pumps for space heating, Heating ventilation and air conditioning zone controls, Lighting, Motors and drives, Pipework insulation, Refrigeration equipment, Solar thermal systems, Warm air and radiant heaters.

In addition, HMRC now regards the installation of double-glazing as an allowable expenditure for tax relief purposes.  Although it does not fall within the ECA scheme, depending on the overall cost, it may be possible to offset the total amount against your tax bill in the first year under the AIA scheme.

4. Tax relief on low emission company cars

There are two ways cars with low carbon dioxide (CO2) emissions can save on tax. If you are buying a new company car with a CO2 emission of not more than 120gm per kilometre, you can claim a 100% first-year allowance for its full cost.  In addition, the taxable benefit to an employee, who is provided with a company car to use privately, will also be lower for cars with lower CO2 emissions.  The Green Car site is an excellent resource to find out more about models available.  On new cars purchased and existing cars owned, the lower the car's CO2 emission rating, the less vehicle excise duty you pay, the DVLA site contains more information on rate classifications.

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