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Solar panels and capital allowances

The capital allowance treatment of assets that facilitate the Feed-in Tariff (FIT) will change on 5 April 2012. This will impact on property owners considering solar power, explains tax expert Chris Mattos.

A business may claim capital allowances if it carries on a qualifying business activity. Where solar panels are concerned, if they are to be installed on a property used by a company but owned personally by the company’s owners who do not charge rent (for Entrepreneurs’ Relief purposes), capital allowances may not be due.

Assuming capital allowances are available, our approach has been to treat any surplus above the Annual Investment Allowance (AIA) as a long life asset on the basis that many manufacturers are guaranteeing solar panels for 25 years. At present, solar panels do not qualify for Enhanced Capital Allowances (ECAs) which enable a business to claim 100% first-year capital allowances on their spending on qualifying plant and machinery.

HMRC issued a consultation on 31 May 2011 setting out the proposed framework for capital allowances going forward and highlighting some of the current areas of uncertainty. The consultation outlines the Government's view fairly clearly, stating: ''As the tariff levels are carefully set to provide a sufficient investment incentive, extra capital allowances incentive to invest in [solar] is not appropriate."

The consultation sets out a proposal that expenditure incurred from April 2012 on plant and machinery that qualifies for FIT will specifically be designated as special rate expenditure (or in other words, the current 10% rate, reducing to only 8% from April 2012). Furthermore, those parts of an installation could be classed as “integral features” (as these include electrical systems) or, as noted above, long life assets. However hotels, offices, shops and showrooms may be excluded if the fixture is provided for use in these types of premises.

At present, as the AIA is set at £100,000, the majority of a system will be covered. However, after April 2012 things will be very different.  The AIA is to reduce to £25,000 and the outcome of the consultation will mean further changes. The companies that install solar panels do not factor tax into the investment return for a business (let alone changes in capital allowances) so it is important that property advisers highlight these changes to clients considering solar power.

For more information, contact Simon Brereton, Director at Watts Group, on 0161 831 6180, or Chris Mattos FCCA CTA ATT, partner at Randall & Payne LLP, on 01453 763471.

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