Many individuals and businesses have installed solar panels. This may be a good investment, and is certainly good value in terms of carbon pollution reduction. We are often asked about the tax implications of the Feed In Tariff (FiT).
Income tax and corporation tax on the FiT
The starting point is that the FiT is generally taxable income. In a company, partnership or sole trader accounts the FiT payments will be recorded as other income. This will increase taxable profits and therefore increase the income tax or corporation tax payable.
Landlords of let properties also have to include the FiT as taxable income, usually under the heading of miscellaneous income.
No income tax liability will arise where an individual generates electricity mainly for use in their own home:
ITTOIA/S782A provides an exemption from income tax for an individual’s income from the sale of electricity generated by a micro generation system where:
a. the system is installed at or near domestic premises occupied by the individual, and
b. the individual intends that the amount of electricity generated by the micro generation system will not significantly exceed the amount of electricity consumed in those premises.
VAT on FiT
The FiT is outside of the scope of VAT. No VAT needs to be declared on the FiT income.
This does not prevent the VAT on solar panels being reclaimed. If the panels are used to generate electricity as a business, or to generate electricity used in a business, then subject to normal rules the VAT on the panels can be reclaimed.
Some care is needed when reclaiming VAT on solar panels:
- If the wrong rate of VAT is charged by the supplier, then the purchaser of the panels cannot reclaim the excess VAT. For example, if a supplier incorrectly classified a building as non-residential and therefore charged 20% VAT, but should have charged 5% VAT. In this case the purchaser can only reclaim 5% even if they have paid the supplier the whole invoice including 20% VAT. Businesses incorrectly claiming back the whole 20% have been subject to penalties, even though it is really the supplier’s mistake.
- If there is a mixture of business use and private use (e.g panels installed on a farmhouse, or where someone has a home office) then only a proportion of the VAT can be reclaimed.