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The government introduced tax incentives in the 2008 budget to encourage property occupiers and investors to embrace more green initiatives leading up to the imminent introduction of Energy Performance Certificates (EPCs). But how far do these measures go and what returns to they generate?

Tax deductions on capital expenditure are not new. The budget has simply increased the scope and scale of the legislation.

For instance efficient lighting has been available as a tax deduction since 2001, but previously rules prevented all but specialised lighting; in for example retail showrooms, from qualifying.

From 1st April 2008 lighting in all commercial buildings will be tax deductible, and if energy efficient, receive a 100% deduction in the first year.

The rationale behind this move is simple, for buildings to achieve higher EPC ratings they must increase their energy efficiency. Yet to encourage investors and occupiers to invest in energy efficient buildings there has to be more on offer than simply lower running costs; to this end the level of Capital Allowance relief that can be claimed has been increased.

Features targeted

Heating and Lighting, Ventilation and Air Conditioning (HVAC) systems can each account for up to 40% of a building鈥檚 energy use while the Carbon Trust estimates 66% of a building鈥檚 heat is lost through it鈥檚 fabric. The cost of this generating this heat in the first place can account for up to 15% of a building鈥檚 energy costs.

These figures are not insignificant and as such lighting, active facades, external solar shading and thermal insulation were singled out in the Budget as areas where substantial improvements could be made. As such from April 2008 all four will qualify for capital allowances at 10% Writing Down Allowances (WDA) on a reducing balance basis.

Lighting
By incorporating energy efficient lighting into a property it is argued energy costs can be reduced by up to 75% and heat emissions from lighting by up to 70%. The resultant reduced energy usage on HVAC systems would help improve a building鈥檚 EPC rating.

As lighting is eligible for the 10% tax deduction per year, this paves the way for commercial investors to claim Enhanced Capital Allowances on energy efficient lighting and controls, which in turn are available as a 100% first year allowance rather than as staggered payments.

Active facades
Active facades are a relatively new technology and involve air passing through a mechanically vented cavity wall to reduce solar gain in the summer and improve insulation in the winter. It is claimed that they can reduce the HVAC energy usage of a building by up to 40%. Subsequently the impact on an EPC rating can not be underestimated.

External solar shading
External solar shading works by reducing a building鈥檚 solar heat gain. Various systems are available, the most well known being Brise Soleil. It is estimated that this feature can reduce up to 20% of the energy used to cool a property from solar heat gain but if combined with Active Fa莽ade the savings would be even greater.

Capital Allowance relief is not limited to Brise Soleil; other forms of external solar shading are included 鈥� external blinds, canopies, window film. The full detail as to what exactly qualifies as shading has not been published.

Thermal insulation
While the thermal properties of modern and new buildings have drastically improved, those of many older structures often lack the thermal properties to reduce heat loss and achieve a higher EPC rating.

Subsequently HM Revenue & Customs (HMRC) have extended the capital allowances regime to include thermal insulation expenditure incurred on all existing commercial buildings. In this definition of thermal insulation the category includes, but is not limited to, windows, doors, draught exclusion, roof linings and cavity wall insulation.

It has been proposed that there is the possibility that the meaning of 鈥榠nsulation against loss of heat鈥� could be extended. For example, by replacing an entire existing roof cladding system with an insulted roof panelling system, where it can be demonstrated that the primary purpose of the insulation is the 鈥榠nsulation against the loss of heat鈥�, it could be possible to claim the entire roof as thermal insulation. However this has yet to be tested and receive a view from HMRC.

Each of these measures on their own would go some way to improving an EPC rating but combined they could generate significant results.

By combining the potential reduction in energy usage with the availability of capital allowances relief and from April 2008 there is a real incentive for investors and occupiers to invest in energy efficient and environmentally beneficial technologies.