Updated: Jul 5, 2020
There has been a plethora of initiatives this year on energy performance from the UK government and last month was no exception with new calls for evidence on Helping businesses to improve the way they use energy and Energy Performance Certificates for Buildings.
Both stem from the Clean Growth Strategy (CGS), published in October 2017 which committed the government to consult on a package of measures to support business to improve how productively they use energy (including the merits of tax incentives such as Enhanced Capital Allowances).
Make no mistake, the government wants to improve energy efficiency in business and industry by 20% by 2030 and halve the energy use of new buildings by 2030. To help support this aim we look at LED lighting which according to the The Climate Group has the potential to save 403 million tonnes of CO2 a year and $94bn on energy bills.
What is LED?
A Light Emitting Diode (LED) is an electrical light source that only allows an electrical current to flow in one direction. LEDs contain two conductive materials that are placed in contact with each other – once electricity is applied to the diode, the atoms in one material become charged with energy. This energy is then released in the form of electrons into the other conductive material – this release of energy is what creates light.
This process of generating light is what distinguishes LEDs from traditional lighting, as regular incandescent bulbs produce light by creating heat which is more energy intensive and therefore, costly over time.
The upfront cost of switching to LED lighting is unquestionably higher compared to traditional lighting but this is quickly over shadowed by the energy savings (up to 90%) and significantly longer life spans. For a more precise cost benefit analysis a detailed assessment should always be completed.
Retro fit lights with LEDS
It is sometimes possible to retro-fit LED bulbs into traditional incandescent or halogen lamps. The main challenge is heat dissipation of the bulbs, especially when used in enclosed light fittings.
If you already use the building for the purposes of your trade then the logical tax treatment will be to treat such costs as a repair, under the principle that LEDs are the modern equivalent for light fitting replacement.
However, if you are property businesses and capitalise these costs, it is more likely that you will wish to consider the Enhanced Capital Allowances (ECAs) rules instead (see below).
Full LED conversion
To reflect any potential problems with retro-fit and difference in life spans, new LEDs can often be custom installed with specific light fittings to achieve the highest level of efficiency possible.
To what extent this work could be treated as either a repair (deductible in line with accounting treatment) or capital (and therein potentially eligible for ECAs) will be determined by the circumstances and extent of wider works involved.
New building works that incorporate LED lighting will normally be treated as capital by the new owners who will need to consider the ECA rules.
Enhanced Capital Allowances
Enhanced capital allowances offer business a timing advantage. Instead of being written off at 8% per annum (on a reducing balance basis) qualifying LED lighting costs are deductible in full in year 1 (currently a saving of £19 for every £100 incurred for companies).
The UK government updated its accelerated tax relief (Enhanced Capital Allowances) for energy efficient lighting on 22 March 2018 and published new guidance on what it will be looking for to support claims in June 2018.
Because lighting (including LEDs) is an ‘unlisted technology’ for ECA purposes, businesses must obtain a statement of compliance from the manufacturer that the product and the equipment supplied meets the eligibility criteria and included in the latest guidance are links to an updated checklist and letter template.
Expenditure on the provision of LED lighting can include not only the actual costs of buying the equipment, but other direct costs such as the transport of the equipment to site, and some of the direct costs of installation.
The call for evidence on Helping businesses to improve the way they use energy’ was published on 18th July and closes on 26 September 2018. The call for evidence on “Energy Performance Certificates for Buildings” was issued on 26 July 2018 and closes on 19 October 2018.
Both calls for evidence apply predominantly to England, though any proposals on the Private Rented Sector Regulations would be expected to cover England and Wales. The promotion of energy efficiency is devolved in Scotland and Wales when done other than by prohibition or regulation. EPCs are a devolved matter in Scotland and Northern Ireland. However, in practice implementation relies upon a number of mutual arrangements.
Energy efficiency is devolved in Northern Ireland. The Scottish Government has set out its ambitions to improve the energy efficiency of all buildings in Scotland in the Climate Change Plan (The Scottish Govt’s Climate Change Plan, Third Report on Proposals and Policies 2018-2032 (RPP3)) and the Route Map for Energy Efficient Scotland (Energy Efficient Scotland: Route Map). As part of the Route Map the Scottish Government is committed to aligning its support for improving the energy efficiency of buildings with support to reduce energy used in industrial process.
If you have any questions whatsoever, please do not hesitate to get in touch.