Richard Turner – Senior Manager
Going green is far more energy-saving light bulbs and recycling bins. Gas and electricity are significant overheads for any business, and with energy price rises outstripping other forms of inflation, this is an area where many businesses can improve their finances.
The problem with renewable technology is its long payback period, but government incentives now make the business case much stronger. And as energy prices continue to spiral, the financial argument only becomes more persuasive.
The government has two incentives to encourage local energy generation. The feed-in tariff (FIT) lets businesses generate their own electricity and sell any excess to the national grid.
And the renewable heat incentive (RHI) pays a tariff for every unit of heating energy generated by sources such as heat pumps, solar panels and biomass-fuelled boilers.
Tax breaks for renewable energy
There are few tax breaks on the feed-in tariff. Domestic consumers are exempt from income tax as long as there is no intention to generate surplus energy, but in commercial installations the income is taxable. For companies, the corporation tax treatment of FIT and RHI is the same as other sources of income.
Despite this, lower fuel costs and income from surplus energy should make the investment cost effective.
Renewable energy capital allowances
If an asset generates FIT or RHI income, enhanced capital allowances (ECA) are not available. However, you can choose whether to claim the FIT or the ECA. The ECA gives a 100% first-year allowance, which is worth considering if you make a substantial capital expenditure.
Where expenditure does not qualify for ECA, normal capital and annual investment allowances are available. Solar panels qualify for the special rate pool, which attracts a writing-down allowance of 8% a year. However, you can also use your annual investment allowance (currently £500,000), which in many cases will provide full relief in the year of expenditure.
Other renewable energy equipment is subject to the normal capital allowance rules, and usually qualify as additions to the general pool, providing they do not qualify as long-life assets (ie with an expected life above 25 years).
FIT income for energy consumed on the premises is outside the scope of VAT, but the sale of surplus electricity may be subject to VAT. Electricity generated by a business or sole trader is seen as a business activity and its income subject to VAT if a VAT registration is already in place. Businesses not currently registered should consider this income when determining if it exceeds the VAT threshold. A domestic dwelling selling electricity on a small scale is unlikely to exceed the VAT threshold.
Domestic users purchasing FIT/RHI generating assets for use in the home will be charged VAT at the reduced rate. For commercial installations, VAT will be chargeable at the standard rate.
Financing for renewable energy
Businesses that buy qualifying equipment can claim tax relief on interest and other finance costs. However, it is worth remembering that the carbon trust offers cheap discounted financing to organisations investing in low-carbon equipment.