Solar Farms

Following the government’s latest review of Feed In Tariff’s, farmers considering installing Solar Panels had until 1 August before the Feed In Tariffs are reduced again:
For a solar panel system installed after 3 March, 2012, the feed-in tariff is currently 15.2p per kilowatt hour (kWh) for a 50kW scheme. For the same system installed and registered after 1 August, the FIT drops by 11% to 13.5p/kWh.
 
This tariff will increase every year in line with the Retail Price Index (RPI) but the payment period has been cut from 25 years to 20 years which will significantly eat into the potential returns over the long-term.
 
The good news is that the government is reintroducing the export tariff - scrapped in March - which is an extra payment received on top of the FIT for selling any unused electricity back to the National Grid. For systems installed after 1 August, any energy exported back to the National Grid will earn an additional supplement of 4.5p/kWh.
 
The FIT will be revised again on 1 November2012 and every three months thereafter. As the cost of solar panels fall, it’s likely the feed-in tariff will drop accordingly, especially as the Department for Energy and Climate Change, (DECC), is anxious the feed-in tariff is not oversubscribed.
 
So, for those committing to the expenditure on a new scheme, what is the tax position?
 
Tax-Free or Business Income?
Where a unit is installed on an individual’s residence and they receive income from electricity generated in excess of their own requirements, this can be tax free. Income tax legislation states that:
‘No liability to income tax arises in respect of income arising to an individual from the sale of electricity generated by a micro-generation system if:

  1. The system is installed at or near domestic premises occupied by the individual, and;
  2. The individual intends that the amount of electricity generated by it will not significantly exceed the amount of electricity consumed in those premises.’

 
Micro-generation is defined as electricity generation of up to 50 kilowatts which is substantially in excess of what could be produced feasibly from any ordinary domestic facility and so could give some leeway within which an individual could use mixed premises such as a farm to benefit from this exemption. Note; the exemption only applies to individuals, not companies.
 
It should also be noted that the legislation does not require the electricity generated to be actually used in the house, simply that it should not significantly exceed it in volume.
 
Whilst the generation could be near the domestic premises it would appear that larger scale schemes could only qualify for tax exemption if there was also correspondingly larger consumption in the domestic premises. This might possibly arise where the occupier of a large house which was also occupied by others (as perhaps with a complex of adjacent estate buildings) was able to construct means to charge those other occupiers and also feed into the grid.
If any scheme does not fall within the definition outlined above, any income from Feed-In Tariffs will be treated as trading income.
 
Capital Allowances
From April this year, expenditure on plant and machinery which attracts Feed In Tariffs is specifically excluded from the enhanced capital allowance regime (ECA’s), (first year allowances giving 100% tax relief). Ordinary capital allowances can be claimed however within the business and a 100% first year allowance for expenditure of up to £25,000 will be available under the Annual Investment Allowance, (AIA). The cost of most commercial schemes will fall outside this limit.
 
Where the cost exceeds the AIA the balance of expenditure will qualify for writing down allowances at the special rate of just 8 per cent. This reflects HMRC’s view that the useful economic life of the panels is more than 25 years.
 
VAT
Where the units are purchased for business purposes by a VAT-registered entity, the input VAT is reclaimable in full on the business element. Where the units are purchased for both business and private purposes by a VAT-registered entity, the VAT is reclaimable to the extent that the units will be used for business purposes.
 
The receipt of the “generation tariff”, that being part of the Feed-In Tariff that is paid whether electricity is sold or not, is not consideration for any supply and so is outside the scope of VAT. The “export tariff” referred to earlier, will be VATable however.
 
Conclusion
All businesses should carefully consider the tax implications when assessing any potential schemes. In our experience, many of the companies supplying PV panels misunderstand or overlook the tax position when providing illustrative quotes and we would recommend you seek advice before committing to any expenditure.

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