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Government Taxes and Incentives

Climate Change Levy

Since April 2001, an energy tax called the Climate Change Levy was imposed on all businesses in the UK, exerting financial pressure to discourage wastage, and use less fuel by maintaining existing systems at peak efficiency and/or upgrading to more efficient systems, thus reducing greenhouse gas emissions.

The tax raised approximately £1 billion in the first year and the levy on electricity is now at 0.47p/kWh +Vat.

Enhanced Capital Allowance

In 2001, the government introduced an energy-efficiency incentive scheme, called the Enhanced Capital Allowance (ECA), as an inducement for businesses to invest in efficient technologies.

Capital expenditure by businesses on plant and machinery normally qualifies for tax relief by way of Capital Allowances, given at the rate of 20% per year, on a reducing balance basis.  However, the Enhanced Capital Allowance scheme permits businesses that invest in certain technologies, such as these heatpump air-conditioning systems, to write off 100% of the full cost of the installation (eg design, transport, craneage, installation and commissioning, etc) against their taxable profits in a single year; the year when that purchase/investment was made.  Businesses claim the ECA in their Corporation Tax Returns.

The government publishes a list of the currently qualifying technologies and specific equipment in the Energy Technology Criteria List.  Every year the Dept of Energy & Climate Change (DECC) and the Dept for Environment, Food & Rural Affairs (DEFRA) review the lists to ensure that the listed equipment continues to qualify.  Any equipment overtaken by later more efficient models are relegated from this list so that only the most efficient of these equipment remain on these list of energy saving technologies.

The ECA scheme is managed by the Carbon Trust.  For enquiries contact the Carbon Trust Customer Centre on 0800 085 2005 or visit the ECA web site at

VAT and Domestic Heatpump Systems

Since 2005, the Government has kept the VAT rate for installation of domestic heatpump air-conditioning systems at the reduced rate of 5%.