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Solar DevelopmentGeneric tax points

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Tax on trading profits

If a corporate vehicle is used, tax ad-justed profits are charged to corporation tax at current rates of between 20% and 23%. If the business is operated via an unincorporated entity (sole trade, part-nership or by trustees) then income tax is payable on the tax adjusted profits of 20%, 40% or 45%, depending on mar-ginal rates of tax for the individuals con-cerned. In addition, National Insurance liabilities will be triggered.

The use of a corporate entity can there-fore be helpful if the idea is to retain profits, or to use the cash generated to repay debt.

Capping of Reliefs from 2013/14

With effect from 6 April 2013, relief for losses and interest paid is restricted to the higher of £50,000 per annum, or 25% of an individual’s otherwise taxable income. This could have implications for the way in which a business is funded, and whether for example interest on debt is inside or outside a business.

Equally, to avoid loss relief being capped, the structure of the business, and the ex-tent to which allowances and reliefs are claimed within that business should be reviewed. There is no point for example incurring expenditure in the expectation

of a claim for AIA (see below) if relief is restricted under the capping rules. The capping of relief does not apply to cor-porate entities.

Financing costs

If the business borrows money to finance the solar PV equipment, it can usually obtain tax relief for the interest costs (but see capping).

If the solar panels are acquired on Hire Purchase (HP), then the business can claim a tax deduction for the interest paid each year (but not the capital cost)

The accounting treatment of an asset bought on HP is as if the asset were purchased outright. This means that it is capitalised in the balance sheet and it is depreciated over its expected useful life, either on a straight line or reducing balance basis. Capital allowances (see below) are available on HP assets as the business is treated as if it owned them outright.

If the panels are acquired under a financing lease, whether the business can obtain tax relief for the lease pay-ments or capital allowances on the relevant expenditure will depend on the exact terms of the lease. The tax and accounting treatment of leases is

complex and specific advice should always be sought when considering the options.

Capital Allowances

Tax relief for commercial depreciation charged in the business accounts is not allowable for capital expenditure. In-stead, Capital Allowances are available based on qualifying expenditure on plant and machinery used in the trade of gen-erating electricity from the solar PV.

Where solar panels become fixed to a building, detailed rules about “fixtures” come into play. The business must have an interest in the land on which the build-ing is located in order to make claim for Capital Allowances where there are fix-tures. From 1 April 2014, fixtures must be quantified and pooled so that a pro-spective purchaser can claim some al-lowances on a future disposal.

Special 100% First Year Allowances (FYA) would be available for any solar PV equipment that meets the definition of being “energy savings plant or machin-ery”. The equipment that qualifies must be in accordance with the Government’s Energy Technology Product List see www.eca.gov.uk although most solar equipment is excluded.

Even if expenditure is listed, generally, 100% FYA are not available if the busi-ness is in receipt of Feed-In Tariffs (FITs) (or Renewable Heat Incentives (RHIs)).

Where FYAs are not available, up to £250,000 of annual qualifying expend-iture can be claimed as an immedi-ate tax deduction through the Annual Investment Allowance (if available) in the year of purchase. This limit is due to reduce to £25,000 on 1 January 2015. Expenditure on plant and machinery in excess of £250,000 qualifies for writing down allowances at 8% per annum, on a reducing balance basis.

Opportunities exist for property owners to invest in renewable energy projects, which can produce attractive returns. But what are the tax issues to be considered for those who wish to become an energy generator?

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Capital gains tax considerations

On a disposal of the land/buildings on which the solar PV is installed capital gains tax will be payable at 28% on any gain subject to being eligible for one form or another of relief. Any gain is likely to be on a grant of a lease over the land or property, and as the lease would prob-ably be short, part of any premium re-ceived would be subject to income tax.

Otherwise any value paid by a purchas-er is likely to represent the residual value of the solar panels, which is likely to be less than cost so that there would be no CGT implications, on that element of the proceeds.

In some instances it will be possible to claim Entrepreneurs’ Relief where the disposal is in connection with the whole or part of the business. There are often ways of structuring a sale to fall within this generous relief but careful and ad-vanced planning is required to potentially lock into a 10% rate of tax.

It is also possible that any gain on the grant of a lease will be capable of roll-over relief. This allows for the gain arising on the sale of qualifying land/buildings to be postponed into an acquisition of a new qualifying asset within strict time-limits. Equally, it might be the case in some scenarios that roll-over relief could be claimed on the payment of a premium over land, if other qualifying gains are to be rolled-over into the project.

Once the Energy business has been es-tablished and is being run in hand, the business could be gifted to other fam-ily members and CGT hold-over relief should be accessible.

Enterprise Investment Scheme (EIS)

The production of energy and the receipt of Renewables Obligation Certificates (ROC) (but not FIT’s) is a qualifying trade for EIS purposes. Accordingly, Solar PV schemes can be set up as an EIS company, with investors subscribing for shares in that company. This has various tax benefits, provided certain provisions are met, which are too many to mention here.

EIS shares qualify for 30% income tax relief on the amount subscribed, capped at £1m per tax year for an investor. An investor and associates (broadly lineal family), can have no more than 30% of the shares in issue.

EIS shares qualify for CGT deferral relief of an unlimited amount. Neither is there a cap on the % owned by the investor.

The deferred gains are released on a sale or disposal of EIS shares, but the gain is washed out on death (except for trus-tees).

Any gain on the EIS shares is CGT free provided income tax relief was available on their issue, the shares have been held for 3 years, and the company remains a qualifying company for that period.

EIS shares should attract IHT 100% Business Property Relief (BPR) exemp-tion after they are held for 2 years.

Structuring a project as an EIS company with at least 4 co-investors can therefore significantly reduce the immediate up front cost of the project. Alternatively, us-ing an EIS company with a single share-holder can defer and often extinguish capital gains realised on other assets.

advanced planning is required to potentially lock into a 10% rate of tax

Expenditure on plant and machinery in excess of £250,000

Inheritance tax (IHT) considerations

Where assets are used for trading purposes, rather than investment, typically 100% BPR should be available against the value of the property (assuming all other qualify-ing conditions are met). The production of energy should be regarded as a trade by HMRC. However, where a single business is undertaken that combines both trading and investment assets care is needed so that the single business unit falls the right side of the line and BPR is retained.

It should still be possible to claim that land remains agricultural even if there are ground mounted installations, on all but the area physically taken up by the installation, so as not to affect any claim for Agricultural Property Relief at either 50% or 100%.

Many energy projects are wrapped within their own Special Purpose Vehicle (SPV). These are usually limited companies. Shares in the limited companies should attract BPR once held for the relevant time of two years.

VAT

If a landowner sells or leases the land on which the solar PVs are to be mounted to an SPV, then that will be an exempt supply unless the owner has opted to tax the land in which case standard rated VAT will be chargeable on the consideration.

Standard rated VAT (20%) will be chargeable on the purchase and installation of the solar PVs. All VAT would be recoverable as long as taxable supplies are being made with the solar PVs. The Feed-in-Tariff consists of two tariffs, the generation tariff and the export tariff. The generation tariff is outside the scope of VAT and if this is the only one received, then none of the VAT incurred would be reclaimable. The export tariff is the consideration received for sale of the energy to the national grid and is a taxable supply. The sale of the energy to third parties will be subject to either standard rated or reduced rated (5%) VAT depending on the customer. Provided that the operator of the solar PVs either receives the export tariff or sells the energy to third parties, then all the VAT incurred will be recoverable in full.

If the solar PVs are installed by the landowner for use in his own business, then the VAT incurred will be reclaimable provided that the business is a fully taxable one. The recovery of the input VAT would be restricted for any private use of the energy, unless a charge is made for this (plus VAT).

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Using pension fundsThree potential ways in which pension funds might be used for the develop-ment have been considered below although each has restrictions which may preclude using funds in relation to solar development.

1. Pension scheme buys shares in the company undertaking the development. The only type of scheme that could be used for this purpose is a Small Self Administered Scheme with the company undertaking the development being the sponsoring employer. These schemes are not prohibited from investing in the sponsoring employer but any investment is restricted to 5% of the market value of the company.

2. A Small Self Administered Scheme is permitted to lend money to the spon-soring employer subject to restrictions. The pension scheme is not permitted to lend more than 50% of the value of the scheme fund and any loan must be secured. Lending must be on commer-cial terms as set out by HMRC.

3. Pension scheme buys the land and develops the solar. There are two po-tential tax issues which make this a high risk strategy. The solar panels might be deemed to be “tangible, moveable property” for pension purposes. In this case a penal tax charge may be levied. In addition to this, if electricity is sold, HMRC may deem that the pension scheme is trading and tax charges would arise. On balance, the risk of significant tax charges do not make this an attractive option.

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Contacts:

savills.com/energy

Giles Hanglin01223 347 27607807 999 204ghanglin@savills.com

Nick Barber01223 347 245 07870 999 202nbarber@savills.com

Andrew Lockwood 01722 434 80001722 434 809andrew.lockwood@smith.williamson.co.uk

Jerry Barnes0117 376 20000117 376 2044jerry.barnes@smith.williamson.co.uk