Tax developments in the renewables and energy efficiency sector – after so many bad news stories, where next?

Written on 7 Mar 2016

The recent tax announcements and changes made by the government in the renewables and energy efficiency sector make for grim reading. A number of tax breaks and incentives have been removed in the last 12 months, leading many to question whether the government is really seeking to encourage growth and investment in this sector.

Abolition of exemption from climate change levy

The first blow last summer was the removal of the exemption from the climate change levy (CCL) for renewables source electricity. The government’s concern was that much of the benefit of the exemption was being enjoyed by overseas projects rather than those based in the UK, but the result is a punitive tax for companies legitimately operating in an environmentally friendly sector, which surely was not the intention behind this tax when it was first introduced in 2001. The changes are currently the subject of judicial review proceedings initiated by Drax Group and Infinis Energy.

EIS closed to new investment in the energy sector

The bad news continues in the Enterprise Investment Scheme (EIS), a beneficial scheme which offers investors a 30% income tax break and complete CGT exemption. The government has over the last few years been gradually excluding activities in the renewables sectors from qualifying for NEIS. The latest announcements in November and December 2015 – first to exclude reserve electricity generating capacity and then any activities involving the generation of any form of energy – have been the final nail in the coffin for EIS companies generating energy. From 6 April 2016 these companies effectively can no longer benefit from EIS going forward, which will inevitably make it harder for them to attract future investment.

Increase in VAT rate on certain “energy saving material”

Following a European Court of Justice case last summer, the government is proposing to remove the 5% reduced VAT rate for “energy saving material” supplied in residential accommodation. Whilst there are some circumstances where the 5% rate can remain, these “get-outs” do not apply at all to solar panels, wind turbines or water turbines. It is proposed that supplies of these items to end consumers will from 1 August 2016 be taxable at the standard 20% rate, representing a significant VAT hike.

Revaluation and increase of business rates

With effect from 1 January 2017, business rates are due to be re-valued based on asset valuations as at April 2015, taking into account the relevant subsidy regime at that date. As the previous valuations were made before the feed-in-tariff scheme was introduced, it is likely that the 2017 re-valuation will lead to an increase in business rates liability for
renewables projects. Furthermore, they may not take into account recent cuts to subsidies, leading to an unfair and unbalanced valuation.

Capital allowances – no change

Despite lobbying from trade associations, capital allowances remain only available at the 8% special rate for expenditure on solar panels, despite the 18% general rate being available for other renewables energy equipment such as wind turbines and 100% for certain other energy saving materials. This inconsistency of treatment remains a source of great
frustration for those in the solar industry.

Cuts to subsidies

And of course on top of all this (and perhaps most significantly of all) we have the much-publicised and highly controversial cuts to feed-in tariffs and support via the Renewables Obligation.

But does the Treasury consultation offer hope?

However, there may be a glimmer of relief in a consultation document produced by HM Treasury in September 2015. It is seeking fundamentally to reform business energy taxes such as the climate change levy and is currently considering responses to the consultation. The proposals include simplifying tax reporting schemes, abolishing the Carbon Reduction Commitment, moving to a single energy tax and harmonising tax rates. This perhaps represents a real opportunity for the government to simplify an overly complex tax regime and even to give something back to businesses operating in the renewables and energy efficiency sector.

A proper tax framework for the renewables and energy efficiency sector

The Chartered Institute of Taxation has in its response to the consultation called for a “roadmap” to provide clarity around the direction of environmental tax policy in this Parliament. It is to be hoped that the government heeds this call and provides a proper framework which once again encourages investment in the renewables and energy efficiency sector through the tax system. In addition to some of the proposals suggested, this might involve a simplified system for energy taxes, a more generous and consistent approach to capital allowances and new tax breaks to replace what has been taken away.

In any case, we can hope the government, having taken so much away, will offer something back. Its formal response to the consultation is expected in the March Budget – watch this space.