Tax and Accounting for Commercial Solar PV
What tax relief is available for companies installing a Solar PV system?
Introduction to tax and accounting
The definitive tax and accounting for a Solar PV system installed by a business will depend on the particular circumstances of the company and the method of financing the system.
The treatment of the investment will also depend on how the system is financed. This guide starts by reviewing the situation for a system that is purchased with cash from a company’s balance sheet and then goes on to look at the implications of some of the common financing structures to the approach.
We cannot give tax or accounting advice but following general considerations may be relevant and can form the basis for a discussion with your professional advisors.
This is one of GreenHearth’s free Guides to Commercial Solar which have been prepared to address the most frequent questions we get asked by companies who are considering investing in a Solar PV system.
Accounting for Solar PV Systems under UK GAAP (FRS102).
The purchase and installation of a Solar PV system is typically treated as the purchase of a tangible fixed asset on the balance at its cost under Section 17 of FRS 102 Property, Plant and Equipment. Cost included the purchase price and any directly attributable costs necessary to commence operation. Generally, GreenHearth’s costs are included in the cost of the asset under clause 17.10(a) for FRS102.
If batteries make up a significant portion of the system, it may be necessary to account for these as a separate asset as a result of the differences in useful life between panels and batteries.
The Solar PV system is then depreciated on a systematic basis over its useful life. Generally, this is done on a straight-line basis over 25 years. Most high-quality panels will come with a 25-year warranty. The 25-year life is also recognised by HMRC, see. HMRC Capital Allowances Manual CA22300.
Taxation of Solar PV Systems
When a business purchases an asset, it is able to deduct some or all of the value of the asset (including delivery and installation charges) from it profits before it pays tax.
The Basic Position - 6% p.a.
In the UK, the installation of solar panels is specifically mentioned in the Capital Allowances Act and identified as a “special rate expenditure” (CAA2001.S104A(g)). This means that by default writing down allowances can be claimed at 6% per year.
However, there are two other regimes that means that generally writing down allowances can be claimed at a faster rate.
Use of the Annual Investment Allowance – 100% in year one
The Annual Investment Allowance (AIA) allows for the deduction of the full value of a qualifying items from profits before tax up to a total of £1m. You can claim AIA on most plant and machinery including Solar PV Systems. Full details on this allowance can be found in the policy paper Legislating the Annual Investment Allowance. If a business uses this allowance, it can deduct the full value of the system from profits before it pays tax.
The temporary special rate allowance – 50% in year one
If the AIA has already been fully used for other purchases, then Solar PV Systems are currently usually qualifying expenditure for 50% first year allowances. Under the April 2023 budget business can claim 50% first year allowances for certain expenditure incurred after 1st April 2023 and before 1st April 2026.
Summary
Most of the businesses we work with are able to take advantage of the Annual Investment Allowance to offset the full cost of the system from their profits prior to paying tax.
Other Taxes
Business Rates
Non-domestic PV generating assets are generally treated as ratable assets, but the rates applied can vary significantly depending on the size of the scheme, the proportion of electricity which is consumed on site and whether the scheme is in England, Wales, Northern Ireland or Scotland which all have different calculations and approaches.
Any new scheme is likely to increase the rateable value of a site when the site is re-assessed.
Solar Energy UK has published a useful document Business Rates FAQ 2023 and the Memorandum of Agreement between the UK Valuation Office Agency which provide useful detail on the subject.
In many cases sites with 50kWp generation capacity or less and mainly for self-consumption are exempt from business rates.
Generally, the government has taken steps to ensure that changes in business rates are not a disincentive to investment for example the Solar UK documents referenced above provides the example of a 120kw rooftop system in England would face an increase in rates for 23/24 of £268 pa.
VAT
Commercial Solar Systems are subject to VAT at 20% which can be recovered in the usual way.
Impact of financing
The arrangements described in the proceeding paragraphs apply to Solar PV systems purchased by a company. In this context the purchaser of the System is the entity which enjoys the risks and rewards of ownership.
Thus, these arrangements apply to a company that purchases the system with cash, debt, a Finance Lease or a Hire Purchase agreement. See for example HMRC Business Leasing Manual 00330 - Introduction: Lease taxation: Hire purchase contracts.
In the financing arrangement is an Operating Lease or a Power Purchase Agreement then the arrangements of BLM00525 apply and the capital allowances accrue to the lessor and payments under the lease are deducted as revenue expenses by the lessee.
For a detailed description of the differences between Operating Leases, Finance Leases and Hire Purchase Agreements please see our Guide to Financing Commercial Solar..
In conclusion
Tax and accounting for commercial solar depends on how the system has been purchased. If the risks and rewards of ownership sit with the business the business will account for the system as a fixed asset depreciated over 25 years but will be able to claim capital allowances equivalent to the full cost of the system in the year it is installed.
You can find out more information about commercial solar by reviewing our other Guides to Commercial Solar.