The climate change levy is a tax on business use of energy which commenced on 1st April 2001. The enhanced capital allowance scheme was also introduced as an incentive for companies to invest in energy efficient technologies, thus reducing their energy consumption. Lets start by looking at capital allowances as they stand today.

What are capital allowances?
Throughout business, investments are made in fixed capital assets for use in the business. Over a period of time, as the assets are used, they will generally fall in value. This reducing value is used in arriving at the commercial profits of the business. However, capital costs are not tax deductable and so instead, a relief is given by way of capital allowances, which are deducted from the taxable profit of the business. Not all fixed capital assets attract capital allowances. The main categories that qualify are,

· Industrial Buildings
· Plant or Machinery
· Agricultural Buildings
· Industrial Know-how & Patents
· Scientific Research

The capital allowance legislation does not contain a definition of either machinery or plant. It specifically deems certain items to be treated as machinery or plant and specifically excludes certain items, but there is no general definition. AC electric motors and drives however are considered to be within the category of plant & machinery and are therefore eligible for capital allowances. To qualify for capital allowances on plant and machinery the person making the claim must meet three conditions,

1) Incur capital expenditure on Plant & machinery for use in a trade
2) Incur the expenditure wholly and exclusively for the purpose of a trade.
3) As a result of incurring the expenditure the plant & machinery must belong to the person.

The claimant will then be able to relieve the cost of the asset against tax over a period of 8 years. In all cases the balance of unrelieved expenditure is carried forward and continues to be written off at the appropriate rate on a reducing balance basis.

Enhanced capital allowances
So, how does an enhanced capital allowance differ from that of standard capital allowances? The only difference is the rate of allowance. An enhanced capital allowance allows 100% tax relief on the capital cost of the asset to be obtained in the first year rather than being accumulated over a period of at least 8 years.

The enhanced capital allowance scheme for energy efficient products
The enhanced capital allowance scheme has a tax-free allowance of 100% of the cost of the asset in the period in which the asset was acquired. This accelerates the relief significantly resulting in considerable cash flow benefits. As an incentive for companies to invest in energy efficient technologies, the enhanced capital allowance scheme will allow energy efficient products, which previously did not qualify for an enhanced capital allowance, to benefit from a 100% first year allowance. The scheme officially commenced on 1st April 2001 alongside the climate change levy. In order to ensure that energy saving improvements are not delayed, any capital investments, that qualify for an enhanced capital allowance, can be included from the date on which the product list was issued. The scheme will be policed by the 'carbon trust' which will run as company limited by guarantee from April 2001. It will be business led and will serve as a focus for strategic action to ensure businesses adapt successfully to the challenges presented by climate change.

The eight energy saving technologies to be included in the scheme are;
· CHP (combined heat & power)
· Lighting
· Boilers
· Ac electric motors
· Electronic variable sped drives
· Pipe insulation
· Refrigeration
· Thermal screens

The enhanced capital allowance Scheme for ac electric motors
All qualifying products will be entered onto the 'UK Energy Technology List', which will be published by the DETR and can be found on www.eca.gov.uk. Only products entered onto this list are eligible for enhanced capital allowances. In order for ac motors to qualify for entry onto the 'UK Energy Technology List' they must meet the specified minimum efficiency levels as stated in the table.

The range of motors included is;
· Cage induction, totally enclosed, fixed speed motors
- 200 to 750v @ 50Hz
- 1.1 to 400kW
- 2, 4, 6, and 8 pole
- standard, Ex N, EEx e, & EEx d
· All multi-speed motors for use on liquid or gaseous movement applications

What is the value claimed for the allowance?
If a motor is purchased as an individual, stand alone, product and is listed on the 'UK Energy Technology List' then the value that can be claimed for enhanced capital allowances is the capital cost of the motor plus any direct installation costs. However, if the motor was purchased as part of a larger item of plant or machinery then the value that can be claimed for enhanced capital allowances is a fixed value per kW rating and speed, click here for table of fixed values. The fixed value incorporates the capital cost of the motor, direct installation costs, and other miscellaneous modifications & extras, and is independent of both polarity and mounting.