Solar panels

‘A tax-free, index-linked return of 10% a year, guaranteed for 25 years’ or an energy efficient scheme that will reduce carbon and consequently the impact on the environment, or-maybe the installation of solar panels can be both these things?

It is, of course, not as simple as that. First, there are two types of solar panel.  A solar thermal system will heat water, but is not included in the special government scheme as yet. The type of panel that does have interesting possibilities in terms of generating income is the photovoltaic panel, or solar PV for short. This type of panel generates electricity from sunlight.

The government has scrapped the grants that used to be available for the installation of solar panels, and replaced them in 2010 with the Feed in Tariff scheme (FITS). This scheme pays system owners a set price for all electricity that their system generates, even if they use the electricity themselves. The rate is currently 43.3p per kWh. This is called the generation tariff. If the system produces more electricity than the owner uses, the surplus is sold back to the national grid at 3.1p per kWh. The rate is fixed by statute to increase in line with the retail price index for the next 25 years. It is estimated that a 3.5kW system should bring in around £1500 a year every year.

If the solar panels are fitted to a private residence, this income will be tax free, but businesses and landlords that rent out the accommodation need to be aware that their payment will been seen as taxable income, subject to income tax or corporation tax as appropriate.

Solar PV systems are not included in the enhanced capital allowance (ECA) scheme (although solar thermal systems are). However, if a solar PV system is at a business premises, it will fall under the normal annual investment allowance. Even when the annual investment allowance is reduced from £100,000 to £25,000 in April 2012, this should be sufficient to cover the costs of a medium sized solar installation. As well as being able to claim the capital allowances, up to possibly 100% of the cost, the business will benefit from savings in costs for electricity and also receive income from the FITS scheme. Businesses can install systems up to 50kW and still claim FITS payments.

VAT on solar panels is at the lower rate of 5%. If a trader is registered, VAT is fully recoverable on the equipment and installation costs. There is no VAT on generation tariff income, but if the trader is registered, VAT of 5% should be charged on the export tariff.

In order to encourage early take up of the scheme, the rates offered now will be reduced next year, so a household or business having a system installed now, will benefit from higher rates of FITS payments, than will be received for an installation in 2012.

Further information is available on the Department of Energy and Climate Change's website.