Tax Free Scheme for Individual Homeowners
When an individual household installs a 2.5 kW solar system, for example in South Central England, then they should be able to generate around 2,125kWh of electricity every year, earning £ 440 of tax free generation tariff each year (at the present rates). For private householders (non-commercial), all income from Feed in Tariff payments is tax free.
If around 1500 kWh is used at home annually, this will result in a further tax free savings of £210 per year, again taking into account the present tax rates, and the rest can be exported to the grid, earning some more money in the process. The tax free exemptions are valid only if the generating unit is installed at or near domestic premises and the electricity generated is not significantly over the amount required.
For a houseowner, paying a 50 per cent marginal income tax rate, with a 2 per cent average inflation rate, 9-13 per cent will be the Taxable Equivalent Nominal IRR and would not be tax free as a result.
Commercial Establishment Tax
For non-domestic or commercial users, however, these exceptions of feed in tariff and tax are not valid. If the commercial establishments are VAT registered, they will be charged on the export feed in tariff, and also on the feed in tariff units used by any tenants. The income from the feed in tariff will not be eligible for tax exemptions or will not be tax free. The micro-generation system plant elements will come under eligibility for capital allowances if they have been bought by a commercial organisation. If there is a mixture of private and commercial usage, then the capital allowance will be valid on the commercial part. Based upon the size and type of system installed, increased capital allowances could be valid, along with the yearly investment allowances.
If a commercial establishment or company purchases and installs a solar PV on its roof and then exports the surplus electricity, the income earned by the commercial establishment will be considered as profit and will not be tax free as corporation tax will be liable.