How the ACA works
The ACA lets you cut your company's taxable income by 100% of the capital cost of eligible energy-efficient equipment in the first year of purchase. This compares to just 12.5% for ineligible plant and machinery.
With the existing Capital Allowances tax structure, when money is spent on “capital equipment” companies can deduct the cost of this equipment from their profits proportionally over a period of 8 years, i.e. the annual taxable profit is only reduced by 1/8 of the total equipment cost.
With the Accelerated Capital Allowance, when money is spent on “Eligible energy efficient capital equipment”, the company can deduct the full cost of this equipment from their profits in the year of purchase, i.e. the taxable profit in year one is reduced by the full cost of the equipment.
ACA Example:
Consider the example where a company has €100,000 profit at the end of their accounting period, on which they must pay 12.5 % corporation tax. The same company has during that period, purchased capital equipment that cost €20,000.
In the first year the equipment was purchased the following scenarios can be compared:
- Standard Capital Allowances applies for general equipment purchases
- ACA applies for eligible energy efficient equipment purchases
Cost of Purchased equipment = €20,000
| | Baseline situation | Standard Capital Allowances | ACA |
| Proportion of deductable Capital Equipment costs | NA | 1/8
(12.5%) | 8/8
(100%) |
| Deductable Capital Equipment costs | NA | €2,500 | €20,000 |
Taxable Profit:
(minus deductions) | €100,000 | €97,500 | €80,000 |
| Tax payable on profit @ 12.5%: | €12,500 | €12,188 | €10,000 |
| Tax saved with deductions | NA | €313 | €2,500 |
With the ACA the company has €2,187 extra cash to spend on eligible energy efficient equipment.
When planning to buy new equipment, you should consider its cost over its lifetime. A non-ACA listed product may cost less to buy, but the ACA could equalise this cost in the first year or so - and as a result of purchasing the more energy efficient equipment you will also immediately begin to save on energy costs!
In summary, the ACA benefits you by ensuring:
- increased opportunities for further investment
- a shorter break-even period on the investment
- a higher return on the investment
- lower ongoing energy costs through using energy-efficient equipment
- a marketing edge through being environmentally friendly
- a higher real value on capital allowance return in an inflationary market
