Tax should be a key consideration for businesses throughout
the life cycle of any renewables project – the financial impact on project
returns can be significant. Tax challenges (and opportunities) are present at
every stage and knowing what to look out for (and when) is essential.
So what should renewables businesses be aware of?
Tax assets and reliefs
allowances: getting the paperwork and timings right
Capital allowances can be crucial to the
financial viability of a project. They arise as a result of expenditure on
plant and machinery and can be used by taxpayers as a deduction against taxable
profits over a period of time. So, on a wind project for example, expenditure
on turbines, motors and the like would benefit from allowances. The rate at
which deductions can be made varies:
- The general rate is 18% per annum.
- There is a reduced rate of 8% for specified
integral features and long life assets. An example is solar panels, but there
is a discrepancy with wind turbines, which benefit from the higher rate.
- An enhanced 100% rate is available for specified
items including energy saving (but not energy producing) materials.
- There is a 100% annual allowance for the first
£200,000 of qualifying expenditure each year.
The allowances can lead to significant
savings for renewables businesses and will usually be taken into account in
modelling expected future returns. However, there are conditions to be met
before allowances can be claimed.
One example is that the company
must have an interest in land at the time that the machinery is fixed to the
ground. It is important that relevant documentation, including lease agreements
and EPC contracts, are signed at the right time and in the right order and by
the right parties. Advice should be taken at an early stage to ensure that
nothing is missed.
of interest: interest deduction restrictions from April 2017
There are projects with a high level of debt
that may be adversely impacted by the government’s proposed changes to the
deductibility of interest for tax purposes. From April 2017, new rules will
come into force introducing restrictions around corporate interest deduction,
including a fixed ratio rule limiting corporation tax deductions for net
interest expense to 30% of a group’s UK EBITDA, as well as a group ratio rule.
These changes implement the proposals recommended by the OECD as a result of
its work on Base Erosion and Profit Shifting.
Some projects may find that they are not
able to reduce their taxable profits in the way anticipated in their financial
models, which could have a significant impact on expected returns. The full
detail of this is still being consulted on, but the impact on both existing and
new projects will need to be carefully considered.
Investment Scheme (EIS): continuing obligations to investors
EIS is a generous (and complicated) tax
regime offering individual investors 30% relief on the total amount invested
and a blanket exemption from Capital Gains Tax. Over the last few years, the government
has gradually been closing down EIS for companies in the renewables and energy
efficiency sectors. Therefore a company
involved in the generation of any form of energy can no longer
qualify for EIS in respect of future investment.
This does not mean the end for EIS in the
industry. There will still be individuals and funds who invested in such renewables companies
before the rule changes who are expecting to benefit from such reliefs.
There will be EIS conditions which the
company must continue to comply with broadly for a period of three years after
the relevant investments are made. Companies should be aware of these
conditions and ensure that nothing is inadvertently breached (for example, a
change in the articles of association which gives the EIS class of shares a
prohibited preferential right on a return of capital).
There will also be companies involved at
different stages of a renewables project who may still qualify – an example
will be a company who is involved in producing renewables technologies rather
than energy generation itself.
Ongoing tax compliance during the project’s life cycle
Duty Land Tax (SDLT): avoiding interest and penalties
SDLT is payable on the grant of a lease over
the land on which the project will operate. Such leases are often
“turnover” leases – where the landlord and the project developer
agree that the level of rent is dependent on the financial performance of the
project. With such a degree of uncertainty, the rules require that an estimate
is made of the anticipated return and expected final rent. At the end of a five year period the tenant
will need to revisit the SDLT calculations depending on how much rent was
Failure to account for any
additional SDLT will lead to interest and penalties on top of the outstanding
tax. It is therefore important to stay on top of this.
SDLT issues can also arise in a number of
other situations on projects, particularly in the context of rooftop solar
projects where HMRC deem the landlord of the roof space to be in receipt of
deemed rent in the form of “free electricity”. There can therefore be
cases where it may appear that no SDLT is payable due to a very low level of
rent, but in fact the rules require a form of deemed rent.
Industry Scheme (CIS): understanding obligations and compliance
As a general rule, businesses carrying on
construction operations may be required to comply with the rules of the CIS. Therefore
a company which is installing equipment onto its land, as part of an early
stage of a project, may sometimes find itself within the scope of the CIS.
It is mandatory for a contractor who falls
within the rules to register with HMRC and to verify the identity of its own
sub-contractors. This means checking with HMRC to see if the sub-contractor is
registered and whether they should pay the sub-contractors gross, or deduct any
tax (at 30% or 20%). The contractor must also make monthly returns to HMRC and
keep appropriate records.
The contractor will be primarily liable to
pay any tax which should have been withheld and it is important that it
complies with its obligations to avoid an unexpected tax hit.
ensuring full recoverability
VAT compliance should be relatively
straightforward in the context of renewables projects. Supplies of electricity
are generally standard rated (at 20%), with a reduced rate (of 5%) for supplies
into residential properties. Unlike in the context of land, there are no exempt
or zero rated supplies.
However, there are still traps. There may sometimes be significant amounts of
VAT incurred and paid on costs before a VAT registration is in place or before
trading starts – and which the company is seeking to recover from HMRC. Or
there may be uncertainty over who is the correct beneficiary of each supply and
to whom invoices should be made out to. These types of issue can impact the
recoverability of VAT, so it is important to take advice at an early stage to
avoid unexpected tax leakage.
rates: upcoming increase in rates next year
Problems regarding an increase
in business rates arise because the revaluation will, in some cases, take into
account government subsidies in the methodology for the first time; but since
it is based on the position at April 2015 it will not take into account the
recent cuts to subsidies.
Some businesses are concerned
about significant uplifts in rates and trade associations have been lobbying
the government to make them aware both of the unfairness and of the financial
impact on projects. Different types of projects will be impacted in different
ways. We will be monitoring developments during the rest of the year.