In the second article on the financial environment for renewable energy schemes, Francis Clark’s Energy and Renewables specialist, Bob Meier looks at the first of two business models.

There are two principal ‘business models’ that are available to individuals and businesses considering the installation of renewable-source electricity generating equipment:

In the first; the individual or business occupying the property acquires and installs the necessary generating equipment, generates the electricity themselves and sells any surplus power to an electricity supply company.

The second ‘model’ involves the leasing of ‘space’ (e.g. a roof or a field) to allow the installation of generating equipment that is owned by a generator who will ‘own’ the electricity produced, paying rent to the property’s owner.

Property’s occupier owns equipment: Model 1

If the generating equipment is associated with an existing business activity, the income received may be treated as ancillary to the existing business income or the electricity generating activities may amount to carrying on an entirely separate trade. 

Where it does amount to a new trade, the commencement rules will apply.  In all cases the finance and other costs of the generating activities will require identification and allocation and appropriate claims to Capital Allowances for the equipment costs will need to be considered. 

Some elements of these capital costs may qualify for Enhanced, 100% First Year Allowances where qualifying equipment is acquired.  In other cases the allowances may be limited.

Where thedomestic microgeneration of electricity does not exceed 50kW and the generation equipment is at or near domestic premises that are occupied by the taxpayer with the intent that the amounts of electricity generated will not ‘significantly exceed’ domestic requirements, then income from Feed-In Tariffs (FITs) or Renewable Obligation Certificates (ROCs) will be exempt from tax.

Where domestic electricity generation is more than 50kW but under 5MW, the sale of surplus energy, the receipt of a FIT subsidy where it is business related and the receipt and sale of a ROC will all be taxable

HMRC has not given any explicit guidance on mixed use premises; but it is likely that provided an electricity generating facility is in the proximity of a domestic dwelling – such as a farmhouse – and provided the generating capacity does not ‘significantly exceed’ that of the dwelling’s requirements, then the IT exemption for microgeneration will be available – even if the electricity generated is, from time to time, used by the farm buildings and equipment.

Where payments for FITs/ROCs are received as part of or a trade or other business activity there will be no tax exemptions applicable and the whole amount of any FIT/ROC received will be taxable as part of that trade/business (i.e. both the generation and export elements of the FIT).  If the generation activity is sufficiently organised as a separate activity it could be taxable as a trade in its own right. 

Some capital taxes’ reliefs for trading businesses may be affected if the generating activity amounts to a new trade. Other reliefs will continue to be available where the underlying requirement for relief is that a trading activity is undertaken. 

Professional advice is required to establish what constitutes a qualifying trade and which taxes/reliefs apply.

For further information:

Bob Meier, Energy & Renewables Senior Manager at Francis Clark LLP
Telephone: 07969 000 003

Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. Francis Clark is the winner of the ‘Auditor of the Year - Mid Tier’ in the National Financial Directors’ Excellence Awards 2011, and LexisNexis Best General Tax Practice Award 2009. More information is available by logging on at our Online Information Centre