Many people are jumping on the renewable energy bandwagon, but there are a number of misconceptions about the tax treatment of this new industry. Catherine Vickery, tax planning manager at accountant Old Mill, explains.
Generating renewable energy can be a great way to boost your income while cutting costs and your carbon footprint. With the government’s introduction of Feed-in Tariffs from April 2010, investing in renewable energy projects has finally become financially viable as well as environmentally attractive.
But, as with any new industry, there is a great deal of uncertainty – not least in the tax treatment of the FiTs, capital outlay and income generated. With many installers vying for business, it is essential that potential investors understand the tax implications before committing to a particular project.
The first common myth is that income from electricity sales and FiTs is exempt from Income Tax. This is not always the case. In general terms, renewable energy installations are a trade and therefore taxed as any other business. This means income from electricity sales, FiTs and the savings from personal use of your own power, will all be subject to Income Tax.
However, there is an exemption for individuals (not businesses) with a domestic installation. Micro-generation equipment must be installed at, or within the curtilage of a dwelling house; and the power generated must not significantly exceed the amount of electricity consumed at those premises. There is, as yet, no definition for “significantly exceeding” domestic consumption, but the household demand should represent the majority of the generation.
The supply and fitting of energy materials and equipment to domestic premises attracts a reduced Value Added Tax (VAT) rate of 5%. Businesses will be required to pay the standard 20% rate, but can reclaim it, as for other input VAT. Sales of power by a business will also be subject to standard VAT, but FiT payments are excluded, as is power generated and used internally by the business.
If, instead of investing in an installation yourself, you decide to rent a roof or some land to a developer, then the rental income and any lease payments are taxable in the same way as any other rental arrangement. The payment of up-front options will be subject to Capital Gains Tax.
Many potential investors are trying to get projects underway before the FiT rates are cut in April 2012. But there is another reason to bring expenditure forward, as Capital Allowances are also due to be slashed from that date.
Although individuals relying on the domestic exemption from Income Tax do not qualify for Capital Allowances, businesses should be able to claim 100% Annual Investment Allowance. This is available on the first £100,000 of expenditure on renewable energy equipment in the 2011-12 tax year, with any expenditure above this threshold qualifying for an annual write-down of 20%.
However, from April 2012, the amount available for 100% Annual Investment Allowance will be reduced to £25,000 and the annual write-down will fall to 18%. Bringing projects forward into the 2011-12 tax year could therefore save many thousands of pounds.
• For more information contact Catherine Vickery on 01935 426 181.