Government accused of undermining green tax breaks

Tax breaks on businesses' green investments could be seriously undermined from April due to proposed changes to the tax allowances available for capital investments.

Under the new Annual Investment Allowance (AIA), spending on capital items will qualify for a 100 per cent tax break, up to an annual limit of £50,000.

Patrick King, of accountants MacIntyre Hudson, said the tax break was intended to replace the recently axed industrial building allowances and incentivise smaller businesses to make capital investment.

However, there is a danger that in extending 100 per cent tax breaks to all capital investments under £50,000, the Treasury could have inadvertently undermined its existing Enhanced Capital Allowance (ECA) scheme, which offers 100 per cent first-year capital allowances on investments in green plant and machinery, such as energy saving industrial and office equipment, water conservation systems and low carbon cars.

"The changes could counteract attempts to get people to buy greener kit," said King. "If you previously could only get the 100 per cent tax break on greener kit but can now get it on anything, then the standard, less green option may now look relatively more attractive [from a financial perspective]. It makes the less green option, which is usually cheaper in the first place, cheaper still."

David Teale, director of tax at accountants and business advisers DTE, agreed that take-up of the green tax breaks could be adversely affected by the introduction of the AIA.

"The government has said that the tax breaks on energy efficient kit will continue, but if you can get a 100 per cent tax break on any capital investment then there is a possibility you'll be more tempted to go with standard equipment," he said.

A spokesman for the Treasury accepted there was a risk that green spending decisions could be impacted by the changes, but argued that there was still a compelling case for firms to focus investment on energy efficient equipment.

"While for businesses with levels of investment below the level of the AIA, the tax savings from investing in green technologies will no longer be greater than other plant and machinery on the market, the benefits of investing in such technologies are also [found] in the form of reduced energy and water usage, which reduce costs over time and continue to make such investment attractive," he said.

The government has also extended support for loss-making companies investing in green technologies, he said, through a new scheme introduced at the same time as the AIA tax break was announced.

"Loss-making companies investing in green technologies will be able to surrender the losses from this investment in return for a cash credit of £19 for every £100 invested, further encouraging investment in these technologies by loss makers in general and start-up companies in particular," he explained.