Renewable energy has received a huge amount of publicity over recent months. The UK Government has committed to a large reduction in carbon emissions and an expansion of renewable energy production is seen as an essential part of meeting this target.
The economics of many renewable energy projects has traditionally been poor, with low returns and long payback periods. The introduction of Feed-in tariffs (FITs) and Renewable Heat Incentive (RHI), both of which guarantee payments to the producer of the energy for a minimum of 20 years has resulted in a large increase in the number of small scale energy projects, particularly solar panels and wind turbines.
There are two important tax issues surrounding renewable energy projects:
• Are Feed–in Tariffs and Renewable Heat Incentive payments taxable?
There has been considerable confusion on this topic with many newspaper advertisements stating that they are always tax free. Exemption from tax is only available where the system is installed at or near domestic premises and at least 80% of the energy generated is consumed in those premises.
This means that where the system is installed on commercial property or where more than 20% of the energy is sold back to the national grid, then at least part of the receipt will be taxable.
• What Tax Relief is due on the cost of the Equipment?
Where taxable income is generated from the project the availability of tax relief on the capital cost is important, and a recent announcement from HMRC is likely to spread the tax savings over a longer period.
At present expenditure on renewable energy equipment could obtain 100% tax relief in the year of expenditure, either under the Enhanced Capital Allowances (ECA) scheme or by way of the Annual Investment Allowance (AIA). ECAs are only available on designated energy saving equipment and not all renewable energy technology qualifies. HMRC has recently issued a consultation document which proposes to prevent equipment from claiming ECAs where the equipment could qualify for either FITs or RHI. This change is likely to be implemented in April 2012.
The government had previously announced a reduction in the annual expenditure qualifying for AIA from £100,000 down to £25,000 and this also takes effect from April 2012. Expenditure in excess of the AIA limit qualifies for writing down allowance (WDA), the rate of which depends on the expected life of the asset with long life assets receiving a lower rate. HMRC is also proposing that all expenditure on renewable energy equipment from April 2012 onwards will be deemed to be on long life assets and hence only qualify for 8% WDA.
In conclusion anyone contemplating a renewable energy project needs to be aware of the tax consequences and where possible expenditure should be incurred before April 2012 in order to accelerate the tax relief.
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