Renewable energy has been readily adopted by the poultry sector. But what are the associated tax issues? Giles Hanglin of Savills Energy and Andrew Lockwood of accountants Smith and Williamson explain
Tax on trading profits
Anyone generating a trading profit from their renewable energy project will be liable for taxation.
If the producer is operating as a company, profits are charged corporation tax at current rates of between 20% and 21%.
But if the business operates as an unincorporated entity – such as a sole trader or partnership – then income tax is payable at 20%, 40% or 45%, depending on marginal rates for the individuals concerned. In addition, national insurance liabilities will be triggered.
The use of a corporate entity can therefore be helpful if the idea is to retain profits, or to use the cash generated to repay debt.
If the business borrows money to finance the renewable energy equipment, it can usually obtain tax relief for the interest costs, for example, if the equipment is acquired on hire purchase (HP).
An asset bought on HP is treated as if it were purchased outright. This means that it is capitalised in the balance sheet and is depreciated over its expected useful life, either on a straight line or reducing balance basis.
Capital allowances are also available on HP assets.
But if the renewable energy equipment is acquired under a financing lease, whether the business can obtain tax relief or capital allowances will depend on the exact terms of the lease, so specific advice should be sought.
Capital allowances are available based on the qualifying expenditure on plant and machinery used in the trade of generating heat or electricity.
Where renewable equipment such as solar panels become fixed to a building, detailed rules about “fixtures” come into play. For example, the business should normally have an interest in the land on which the building is located in order to claim for capital allowances where there are fixtures.
Up to £500,000 of annual qualifying expenditure can be claimed as an immediate 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 £500,000 qualifies for writing down allowances at 8% per year, on a reducing balance basis.
Capital gains tax
On a disposal of the land/buildings on which the renewable equipment is installed, tax on capital gains will be payable at 28% for non-corporates, 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 probably be short, part of any premium received would be subject to income tax or corporation tax, depending on the status of the vendor.
Otherwise any value paid by a purchaser is likely to represent the residual value of the equipment, 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 lowering CGT to 10% on up to £10m of gains. There are often ways of structuring a sale to fall within this generous relief, but careful and advanced planning is required.
Where assets are used for trading purposes, rather than investment, typically 100% business property relief (BPR) should be available against the value of the property, assuming all other qualifying 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.
Standard rated VAT (20%) will be chargeable on the purchase and installation of the renewable energy equipment. All VAT would be recoverable as long as taxable supplies are being made with the equipment.
Feed-in-Tariffs consist 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.