Can Tax help your company get to Net Zero?

Cost of your journey to Net Zero

Most companies will need to spend money (capital expenditure) to reduce their carbon

footprint. This could include, for example, the installation of solar/battery storage & LED

lighting and changing diesel/petrol vehicles to electric ones.

For many companies, financing this capital expenditure is a significant obstacle, especially in

this period of economic uncertainty with high interest rates increasing financing costs. Not

surprisingly, decisions are often delayed or deferred - the maňana mentality.

Tax allowances - how you can be quids in

The good news is that your company’s capital expenditure, specifically including new plant & machinery, may qualify for 100% tax relief through Full Expensing (with a potential

alternative route through the Annual Investment Allowance for up to £1m).

The government recently announced that Full Expensing, previously due to end in March

2026, would become permanent. As to be expected, Full Expensing 100% tax relief is

subject to detailed qualifying criteria (which includes electric, but not internal combustion

engine or ICE, cars) and so the detail needs to be looked at.

However, as shown in the example below, the benefits of 100% tax relief through Full Expensing are significant.

Example: Full Expensing

• Company A buys plant & machinery for £100,000.

• Where this qualifies for Full Expensing, Company A will obtain a £100,000 tax deduction in the year of purchase.

o If Company A pays corporation tax at the 25% rate, this will provide a benefit of £25,000;

ie: in effect, the company only has to bear 75% of the asset cost.

o If Company A only pays corporation tax at the 19% rate, the benefit would be £19,000

so reducing to 81% the asset cost it would bear.

o If Company A is not immediately tax-paying but expects to be in the future,

there could still be significant benefits.

Points to consider

Generally speaking, for a company to benefit from Full Expensing it must buy the asset

outright (including with loan finance) or via Hire-Purchase.

Hire Purchase is a well-established way for SMEs and mid-sized companies to finance plant & machinery while retaining the tax benefits from outright purchase. By contrast, where the company leases the asset it cannot generally claim Full Expensing. As a result, when a company is deciding whether to buy/HP an asset or lease it, it should consider the overall position carefully including the tax aspects.

Certain assets relating to Net Zero may also qualify for government and local grants. For

example, electric vans benefit from the government “plug-in grant” (£2,500 or £5,000

depending on size). Local funding schemes may provide additional grants – for example, Surrey County Council’s A3 EV grant funding programme would provide a grant of £5,000 or £10,000 (again depending on size) where specific conditions are met.

Typically, the capital expenditure qualifying for Full Expensing will be reduced by the amount of any grant received but their combined effect can be very powerful in reducing the cost to companies of Net Zero expenditure.

Conclusion

There is no doubt that many companies, particularly SMEs/mid-corporates, find the capital

expenditure needed for Net Zero very challenging. For some of these companies, tax allowances can play an important role in mitigating the cost of the capital expenditure, in addition to available grants, and how the assets are financed are key to this.

Note: The above is for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Independent tax, legal and accounting advice should be sought before entering into any transaction.