Renewable energy enterprises have considerable potential to generate both income and increased business asset value and, therefore, require careful planning to minimise the taxable burden, warned accountants Saffery Champness.
Speaking at the Energy Now Expo 2013, tax partner Alex Simmons told delegates it was advantageous to consider ownership, trading status, operating timescale and future ownership early in the enterprise’s existence.
“A decision over ownership needs to be taken as early as possible,” he said. The capital improvement from bare land to that supporting a renewables enterprise providing a guaranteed income increased capital value and tax liabilities considerably, he explained. Passing on ownership as early as possible in the timeline of the project could save thousands of pounds.
“Decisions may be influenced by who needed income from the enterprise most or, indeed, which part of the (farm) business would benefit from it,” he explained.
The set-up of the business also demanded consideration. A sole trader structure was most straightforward but trading partnerships gave flexibility as to where the income was paid, aiding tax planning, but had no limit to liability should the enterprise fail. Limited Liability Partnerships (LLPs) offered more protection but cost more to administer, he explained.
“The operating period (lifetime) of the enterprise also needs consideration. If receiving FiTs, capital allowances (for writing down the asset’s value) reduced from 20% to 8% in some cases.
Other tax rules wwouldimpact on income. Projects may qualify for the current enhanced Annual Investment Allowance – which has risen to £250,000 for two years from January 2013 – but this can depend on the year end of the farm’s trading accounts.
Succession planning was also critical to reduce exposure to tax, he added. A trading business handing on ownership allows the beneficiary if also a trading entity to defer any capital gain in the enterprise until its disposal. “That can have a significant impact on cashflow,” he added.
In some circumstances a renewable energy enterprise could qualify for Business Property Relief reducing Inheritance Tax liabilities. With so much at stake farmers must seek independent financial advice as early as possible to aid tax planning, he advised.