Tax tips for farm-based solar installations
© Tim Scrivener From small dairy farms to large vegetable producers with power-hungry coldstores, solar PV remains the go-to technology for those looking to reduce exposure to volatile energy markets by generating electricity on-site through a self-invested project.
Among the many considerations for any such a project, tax is probably not particularly high on most lists, but careful planning can help maximise the tax reliefs available, minimise the cashflow impact, and potentially improve the project’s financial position.
See also: Alternative land uses: leasing land for solar – key points
Timing is everything
While solar equipment costs have fallen, commercial ground or rooftop projects can still run to tens, or hundreds, of thousands of pounds, so timing of any purchase is key, both for tax and cashflow reasons, says Hugh Simpson of accountant Ensors.
“At the end of the day, any business struggling for cash will struggle to trade. The timing of purchases is important for determining when tax reliefs can be applied and reducing your potential tax liability, but don’t let the tax tail wag the dog.
“You’ve got to marry everything up, so the cash outlay for a particular project doesn’t put too much cashflow burden on the business.”
Key points
- Plan carefully so cashflow implications are clear
- Date when equipment is brought into use affects capital allowances claim
- Considerations are different depending on business structure – company, sole trader or partnership
- Careful costing needed to assess true benefit, including grant impact
Generally, once quotes for a project have been obtained, that is the time to seek advice to identify what tax reliefs are available and plan project timeframes for the individual business, he says.
Oliver Bond of accountants Old Mill advises farmers planning solar investments to recognise that tax allowances and cost deductions from profits apply in the period the solar asset is installed and “ready for use”, so care should be given to timing, especially if a build spans different tax years.
“Say your financial year ends on 31 March, and you’ve paid a deposit for panels on or before 31 March, but they’re installed six months later, the relevant period for the claim is the later period when the panels have actually been installed and are ready to be used.
“As with all things tax, remember there’s a lag between when expenditure is incurred and when allowances apply.”
Tax relief available
From a tax perspective, solar panels, battery storage – and all necessary infrastructure/works needed for installation (for example, wiring, roof strengthening, groundworks) – are classed as trading assets, so qualify for certain tax reliefs in a similar way to other assets, such as farm machinery.
“In most situations, the primary reason for putting solar panels on the roof of a grain store, coldstore or dairy, for example, is to assist the business with its electricity costs, with perhaps any small surplus sold back to the grid,” says Hugh.
As a trading asset, solar equipment qualifies for the annual investment allowance (AIA) that applies to every farm business, up to a threshold of £1m a year.
Solar panels by default are classified as a “longer-life asset” so would usually sit within the “special rate pool”, which from a tax perspective means that businesses would normally only be eligible to claim a 6% writing down allowance a year – meaning only 6% of the overall cost could be claimed back each year, until the asset is fully written down to nil.
However, with the AIA, there is up to £1m to claim back straight away, says Oliver.
“The only time you might see the 6% allowance being is used is if a farm’s profits in the year of purchase were minimal, but in most cases, farms will generally go for full relief through the AIA.”
Incorporated v unincorporated businesses
The rules are slightly different for those trading as a company, compared with unincorporated businesses such as a sole trader or partnership, as enhanced reliefs and first year allowances are available to companies, says Hugh.
Under the First Year Allowance (FYA) scheme, which was extended until 31 March 2026 in the 2023 Spring Budget, companies can deduct half the value of new solar panel installations from their profits in the first year of installation, thus reducing their corporation tax bill.
The remaining 50% will be written down at 6% in subsequent years.
Hugh says that because it only provides 50% relief, plus HMRC prohibits companies from “mixing and matching”, which means it is not possible to claim half through enhanced relief and the rest through the AIA, the first year allowance is usually of less interest for special rate pool items such as solar panels.
However, another part of enhanced expenditure relief is the “full expensing” option, which offers 100% relief on brand new, unused equipment, such as combines, tractors, cultivators and so on in the year of acquisition.
“This doesn’t apply to solar panels, but it does mean that if you’re buying brand new, unused equipment in the same financial year as a solar investment, you can in theory use that full expensing allowance on the machinery to save the AIA for special rate pool items.
“Historically, few farming businesses generally max-out their AIA, but we are finding that with higher prices for all machinery, including top-end combines and veg harvesters that now cost well over £500,000, it is worth planning expenditure carefully, especially where there are several big-ticket items.”
Careful planning is particularly important for unincorporated businesses that do not have the option of enhanced reliefs, or companies buying used equipment, as in both situations, the AIA is generally the only option, he adds.
Tax on solar income and benefit of own generation
Income from electricity sold to the grid is taxable, and Oliver Bond of accountant Old Mill also notes that whether electricity is used on-site to reduce costs, or sold to the grid, either route is ultimately generating profit, which is taxable.
“Even if you’re using electricity on site and not selling it, you are reducing costs by buying less electricity, which would’ve been deductible from profits accordingly.
“Pound-for-pound, profits will be slightly higher, so you’re essentially paying tax on the cost saving,” he says.
He advises businesses to assess projects on a “net perspective”, considering the tax saved on equipment costs, and the tax implications of any cost savings from buying less electricity, and/or income generated via electricity sales.
“It’s all very marginal, but is worth bearing in mind.”
Equally, any ongoing costs associated with panels, such as insurance, maintenance, and so on should also be considered, as these are all deductible business expenses.
Impact of grant funding
In situations where a grant has been awarded towards the capital cost of solar equipment, then Oliver Bond of Old Mill says the value on which capital allowances are applied is based on the net cost to the business, after any grant has been deducted.
“From a return-on-investment perspective, don’t forget the grant is worth the face value, less the tax you would have saved on it.
“So for a sole trader or partnership on the 20% tax rate, you might only actually be benefiting from 80% of the grant. Despite that, there’ll never be a situation where you’re not better off claiming the grant.”