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Tax situation regarding solar panel installation in large residential estate

Our client manages a large private residential estate in London. The bank are willing to fund a £450,000 solar panel installation, but are insisting that a separate Ltd Co be set up to ringfence the project. Presumably that will be a company limited by guarantee.

Can anyone shed any light on the tax situation? The Ltd Co will be receiving the feed in tariff and the payments for surplus production being exported to the grid. Will the FIT retain its domestic tax-free status within a company (this is an entirely domestic site)? Are the export receipts taxable? To the extent that the various incentive payments fall short of the company's loan repayment and equipment maintenance obligations, the service charge fund itself will need to contribute to the Ltd Co's coffers. Will this income be taxable? The Ltd Co is sure to make an accounting profit for the first few years as much of the contribution from the service charge fund will go to pay the capital of the loan.

Although this is not a trade, I can't help thinking that the existence of 3rd party income (from Govt and electricity companies) must be relevant. All help gratefully received! 

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18th Jul 2011 12:51

some answers

I am not an accountant but am involved in solar panel installations.  Cannot answer all the questions but some snippets might help:

- VAT should be charged at 5% on supply and installation as it is residential accomodation.

- Important to be VAT registered in order to claim back the input tax.  The export tariff is within the scope of VAT so that enables you to claim back all the input VAT.

- The FIT is either outside the scope or exempt VAT.

- AIA and capital allowances regime applies.  Note reduction in AIA next Apr and the likely introduction of reduced rate of WDA for P&M of 8% also next Apr.

- All income (FIT/export tariff/service charges) would normally be subject to corporation tax regime.

- Not sure why you say it is not a trade.  You are spending capital on solar panels and inverters and you are making electricity with them which you are selling, probably for a profit unless you are arranging the income/accounts to make none.

- the third party income you talk about presumably means the FIT/export tariff.  That is not from the Govt - it is from the electricty supplier you choose to contract with.  In that sense the income is actually coming from other consumers.

I'll be interested to see someone explain the advantage of limited by guarantee in this situation.  Mostly I have seen it done by normal private limited companies

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By pembo
18th Jul 2011 15:02

Presumably

from your post you will be able to ensure that the feed in and surplus tariffs are paid directly to the company by the utility company as normally of course it would be credited against the householders bills. If so then the normal tax free status would I think be compromised potentially.

Solar panels although not qualifying for ECAs do for AIA in a normal commercial set up thus there would unlikely be any immediate tax implications were the company to be set up as a profit making business. However presumably had the bank not insisted then this would have been routed through the service company that I presume is not for profit ? If so I would set up the newco as a not for profit company with the service company itself being the only subscriber. That way the contributions would not be taxable.

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Subsidising service charges?

If the management company is akin to a flat management company, ie responsible for collecting and expending maintenance expenditure for the tenants/leaseholders and this is merely an additional cost (at the start) and income (at the end), supplementing this non-taxable activity then I don't see why it shouldn't be tax free.  It's for domestic households or communities and as long as the new company is set up in the same way, ie (as you say) Ltd by guarantee for the benefit of the maintenance charges/tenants then there is no commercial activity.

So AIA, that would apply to a business instalation, would be irrelevent here.

What would be interesting is whether the income & costs flowing through this separate company (and feeding into or out of, the service charge monies) is actually declarable by the company in its accounts at all as, like standard maintenence charges, the company is not actually the beneficial owner?

 

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Thank you all.....

...for taking the time and effort to post your replies.

Paul - the service charge fund itself is essentially just a bank account held on trust by the managing agents on behalf of the tenants as a body (the other party is actually the Residents' Association - a dormant company). "Unincorporated" accounts are prepared and audited under the lease terms, however. To all intents and purposes the situation is exactly the same as would be the case if a flat management company had been used - it just wasn't, for obscure reasons now lost in the mists of time. The managing agent is an entirely separate entity, and no service charge income , expenditure, assets or liabilities hit its accounts.

From your answers, it seems to me that logically, at least, we should be ok with a Newco ltd by guarantee. Firstly, it is clearly a company set up for the benefit of the residents and there is no question of a trade being carried on. Secondly, the only 3rd party income the Newco will receive should be non-taxable in any case as ultimately this is a domestic site. Thirdly, any excess income generated by the Newco (I'm avoiding the word profit) would in some way be channelled back to the service charge fund. It's just a glorified utility bill saving, after all. However, I always get twitchy when I find myself prefacing tax-related comments with "logically" or "should"!    

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19th Jul 2011 09:22

Is income really not taxable

The exemption from tax for the FIT and export tariff is described in BIM40520 and ITTOIA/S782A.  It relates to income tax and uses the words 'individual' and 'separate private dwelling'.  It is not obvious to me this situation falls within the exemption or that you could make it work every year in the life of the loan and 25 years of FIT receipts.  You will be well worth your fee if you make it so!

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Good point well made!

It always pays to read the legislation first! The primary issue here is probably therefore the flat management company / no CT one. So long as certain conditions are met, HMRC will treat flat management companies as effectively outside the CT net. Whether a company sitting next door to the actual flat management entity will be regarded as "qualifying" therefore I have no idea.

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Is it being done on behalf of the tenants?

My point was that if it's being done for the benefit of the tenants then it is not the Ltd Co's money, it is holding it & spending it as trustee.  The scheme is open to Landlords, Housing Associations and Social Housing schemes and therefore I feel that this case falls into the spirit of the purpose of the scheme.

Must be more on this somewhere, maybe via the horse's mouth? http://www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/feedin_tariff/feedin_tariff.aspx

By the way if the company makes any other income, not connected with this or the management charges this may be taxable.  One of my flat management companies (owns the freehold) has 4 mobile phone masts on it's roof (makes a fortune - thinking of adding 10 floors to my house), the rental income from which is taxable.

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25th Jul 2011 12:07

Article

 There is an article on this in the July edition of Tax Adviser

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25th Jul 2011 14:03

David Rangeley

Before the residents go ahead with borrowing money to incur the expenditure on the panels, why not investigate prepackaged schemes whereby the panels are installed for free and the householder takes off any electricity consumed.  The quid pro quo is that the company gets the feed-in tariff, tax free plus the proceeds of sale of electricity to the grid.  Whilst the alternative of collecting the feed-in tariff etc is attractive, there is a long payback period and this will be extended further because of borrowing costs.

Readers may care to take a look at the website of FreeGreenElectricity for more information.

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Arnold28

and?

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