As a great supporter of environmental issues, PAH accounting are always looking at ways businesses and individuals can help the environment. This months guest article is contributed by Chris Mattos of Randall and Payne accountants and explores the issue of Solar Panels. Not only are they very green but they could make a great business investment.
SOLAR PANELS – A BUSINESS OPPORTUNITY?
Whilst sitting on a sunny beach in Devon and enjoying the hottest April since records began, I hazily reflected that we weren’t barking up the wrong tree by highlighting the benefits of solar panels to our clients. This article looks at the business opportunity, briefly highlights some of the financing options and discusses the tax implications of installing solar panels on domestic or commercial buildings.
Most business activities have environmental impacts. Almost all environmental impacts also have business costs, such as consuming raw materials, using utilities such as energy and generating waste. Of these the cost of energy is one that most businesses do not have
control of but this can be changed by the installation of solar panels.
Solar panels may not always be the best option for all businesses (those in the south west and on the coast are much better placed), it may be that it will be more financially beneficial to review other areas of waste and energy usage that may produce a more significant return.
These may include improving the energy efficiency of a building with the use of double glazing windows or insulation.
WHY INSTALL SOLAR PANELS?
As noted above there is uncertainty about the future cost of energy. Since 2005 energy bills have increased by 36% and there are strong indications that this will continue to increase in the future. Given that we are in the worst financial recession since World War II there is pressure amongst businesses to reduce costs to maintain cash flow.
The main pressure on countries to produce more energy from renewable sources comes from Europe. The EU has declared that it seeks to increase renewable energy production from 8.5% in 2008 to 20% in 2020. The UK has a requirement to increase its renewable energy production from 1.3% to 15% of total energy in the same time frame.
FEED IN TARIFF
As an incentive to encourage the population as a whole to use more renewable energy the Government introduced the Feed In Tariff (FIT) on 1 April 2010. This is part of the Government’s clean energy cash back scheme. The FIT gives a minimum payment for each kilowatt hour (kWh) of electricity produced. The minimum payment is fixed at the amount set in the financial year the solar panels first generate electricity and is guaranteed for 25 years rising in line with the RPI inflation rate.
The tariff consists of two elements; the generation tariff and the export tariff:-
The generation tariff is income received for all electricity generated by solar panels regardless of whether it is used by the property or sold back to the National Grid. The tarrif is based on the sie of a system as illustrated in the table below. The tariff is expected to be reduced after 1 April 2012 by around 13%. Therefore there is a strong incentive for businesses to install panels prior to the tariff reduction.
The export tariff is paid in addition to the generation tariff for any energy sold back to the National Grid. The tariff currently set is 3.1p/kWh therefore a 2 kWh power solar panel exporting electricity to the National Grid will generate income of 43.3p/kWh + 3.1p/kWh = 46.4p/kWh
As noted above the tariff rate that is applicable when an installation is in placeand the current rates are very generous. The rates are under review and there is currently a consultation which was issued on 18 March regarding the amounts to be paid on the large installations – those greater than 50 KWH. It is intended that these rates will be significantly lower. This has resulted from a huge take up from potential solar farms that are seeking to make profits from this. As previously noted, the philosophy behind the FIT is that it encourages the population as a whole to invest in renewal energy and is not a mechanism for investors to make substantial gains. That said the levels of tariffs are currently set and any changes will not happen until after 31 July and so there is still a period in which there can be a substantial amount of return from investing in solar panels.
When reviewing the financial impact it is important not just to look at the installation costs and amounts received from the FIT, it is also important to consider maintenance costs, costs of finance and the tax rate of the business or individual.
The following example is applicable to 100 kWh system that is put in place before 31 July.
- A partnership paying tax at 40%
- The purchase is financed through a loan which has a 50% deposit
- RPI continues at 4.8%
- The roof is south facing with a 45 degree tilt
- 33% of the electricity is exported back to the National Grid
- Interest rate is payable at 5%
Based on the above the financial impact over the 25 years is as follows:-
Generation tariff income £1,250,196
Electricity savings £518,111
Export tariff income £38,874
Cleaning costs (£5,000)
Net income before tax £1,802,181
Tax cost (£586,109)
Net income after tax £1,216,073
Therefore the overall impact of the installation assuming an installation cost of £300,000 and loan interest is a net profit of £879,663. Discounting this for the time value gives a very health return of £363,797 with a payback period of 6 years 5 months.
For most systems we are calculating a pay back period of around 7 years and after this there is guaranteed income.
Randall and Payne are certainly seeing interest amongst agricultural and clients with industrial buildings. They are seeing this as a long term investment that is akin to their pension pot. Other clients have also looked to invest to give a diversity of the income that the business receives. This diversity can have an effect on the tax of the business.
The main tax implication is the Capital Allowances on the purchase of the solar panels – there are no particular tax breaks that currently exist for installing solar panels.
Currently the Annual Investment Allowance is set at £100,000 but this then to £25,000 in April 2012 , therefore there is a large cash flow impact of installing a system before April 2012.
VAT on the Purchase of the Panels
If a trader is registered then VAT is fully recoverable on the equipment and installation costs. If an individual is not VAT registered it may be beneficial to do so but the question is should the business or the property be registered?
VAT on Generation
There is no VAT in generation tariff income. This is outside the scope of VAT. VAT is charged on the export tariff income at 5% if an individual is registered.
INCOME TAX/CORPORATION TAX
Individual householders who use renewable technology to generate electricity mainly for their own home will not be liable to income tax on feed in tariffs. Individuals and partnerships will be subject to Income Tax on the income, whilst companies and associations will be subject to Corporation Tax.
Agricultural activities are exempt from business rates. Renewal energy production is not an agricultural so rates are applicable. There are some exceptions:-
For specific technologies installed for own use after 1 April 2012 with electricity capacity less than 50 kilowatts no rates are payable until 1 April 2015.
If most of the power is exported to the grid, rates are payable. For example an 11 kilowatt system would be due to pay rates of approximately £100 per annum.
We then move into a very grey area of tax legislation. The basic question here is can a property change its status by the installation of solar panels? – i.e. can you convert a building’s status so that it qualifies for Business Property Relief or Entrepreneurs’ Relief?
This is an area of planning in its own right. Should the panels be bought in the existing business, a new company or LLP or even a pension fund. Key considerations will include succession and pension planning, together with any requirement for the use of the funds generated. As with all tax planning there is no “one size fits all”, but please let me know if you would like to discuss this further.
Chris Mattos is a tax partner with Randall and Payne and has a broad range of tax experience covering the main stream taxes and those with lower profiles, including Research & Development, Stamp Duty Land Tax, and Tax Credits. Chris, who was brought up in Cheltenham, has helped many Gloucestershire businesses for over 13 years to save tax and is the chairman of the local branch of the Chartered Institute of Taxation (CIOT).