Tax Implications of UK Feed-In Tariff

According to HMRC Reference:Notice 708 (February 2008), the customer will pay reduced VAT on photovoltaic installation at a rate of 5% regardless if it is domestic or corporate. However, domestic or residental customers can not deduct any capital allowances while businesses have that possibility. Of course, it depends on a situation a particular business has, but renewable energy sources installations, where solar installations belong, qualify for additional capital allowance.

If you are not registered for VAT with HMRC than your generation income and electricity export income are VAT free. To qualify, your system must not make much more energy that you consume. A very lose formulation that actually excludes only really big systems and provides HMRC with a weapon against large producers that would try to use this as a loophole.

If you run a business and are registerd for VAT thn you will be charged VAT on electricity export, i.e. for the electricity that you export to the grid. However, incoming VAT is deductible from outgoing VAT. Electricity generation is not subject to VAT. In addition, electricity that you use on site is also free of VAT.

Just for explanation, Feed-In Tariff or Clean Energy Cashback Scheme in UK provides every qualified UK residential and commercial solar installation with three part benefits. First, you are paid for electricity generation (43.3p/kWh for systems less than 4kWp and 32.9p/kWh for systems between 10kWp and 50kWp, indexed with CPI for 25 years). Second, you are paid 3.1p/kWh exported to the grid indexed with CPI for 25 years. Third, you are allowed to use all the electricity you generate for free. To qualify, you need to have solar installed by certified MCS installer that can issue Microgeneration Certification Scheme Certificate (MCS Certificate).

Income from electricity generation and from electricity export for residential customers is deductible from personal tax income base. In other words, you get this money tax free. Depending on your tax brackets this can be a huge saving. If you were in 50% income tax bracket this would be comparable to a taxable income twice the size of your electricity earnings and even at higher income tax rate of 40% this would compare to a taxable income of 1.8 times bigger size.
Additionally, you are allowed to use all the electricity generated for free. Your electricity bill from electricity supplier is lower for saved amount. This is not shown in any way on your income tax report but saved money rises your disposable income. Instead of paying for electricity you can save it or spend on something else, like placing solar panels on your camper.

Electricity generated and exported is paid by your electricity supplier. For business purposes it qualifies as normal income. It makes your income higher and rises your business tax base. Also, electricity that you use on site lowers your costs and thus rises your business tax base. This is something you need to take into account when calculating profitability of solar investment. Also you need to see the implication of capital allowance and possible beneficial effects of bank financing on your cashflow and profitability.

When deciding on purchasing a commercial solar system you should consult a solar broker who sould be able to structure the deal to best fit your financial and tax situation and your accountant who should explain you how all the taxes and costs involved will show on your company annual accounts and tax reports.