If you keep your eyes peeled you may notice more and more offices and farms are subtly adding solar electricity installations. If you look carefully at some carport roofs you may realise they are also solar installations. Possibly London’s most famous installation is the Blackfriars railway station roof which spans The Thames.

Often the electricity is used by the business operating out of the property with excess electricity bring sold to the National Grid. Any receipt from such a sale is taxable. Tax relief is available on the cost of production including the capital costs of installing solar systems.

The typical installation has a reasonable set up cost and then generates income which has low cost of production. Once set up, and other than routine maintenance, there is very little follow on cost associated with the generation of solar electricity. Income from excess electricity is therefore almost all pure profit.

The tax relief on installation of the equipment is broadly aligned to the installation costs. On modest installations this matches the costs. However. the larger the installation the less the matching correlates. The matching is through the capital allowance legislation.

Capital allowances are permitted on solar installation to the extent that there is an installation cost to the business. If a grant is received which contributes to that cost then the capital allowance is claimed on the net cost to the business.

Since 2012 solar photovoltaic systems have been classified as items which attract an 8% annual writing down allowance tax relief. Also since 2012 the rate on which allowances can be claimed for any asset generated income under the feed in tariff is 8%. This compares to rates of up to 18% for tax relief on assets in other industries.

The 8% restriction is not as damaging for smaller installations. The Annual Investment Allowance of (presently) £500,000 (and to reduce to £200,000 on 1 January 2016) can be used to offset against the costs of installation. This gives immediate tax relief for costs up to £500,000/£200,000. The logic being that the smaller sites are likely to be for the benefit of the operation of the business and not built solely to generate feed in tariffs. Once the installation is sufficiently large that feed in tariffs are earned then the annual investment allowance is no longer available. If the business foregoes the tariff payment then first year allowances can be claimed.

For the small scale business wishing to use its environment to reduce electricity costs and possibly generate extra revenue there is capital allowance planning to consider. Large dedicated installations have fewer options in their capital allowance planning. This landscape may change with the recently proposed reduction to feed in tariffs. From 1 January 2016 it may be beneficial to disclaim the tariff to access the immediate tax relief.

Given the reasonable costs of set up another factor is financing any debt used to set up the installation. The lender may wish to see evidence that electricity will be generated in sufficient quantities to realise revenue streams. Part of the revenue stream may be used to repay the lender. Capital allowance planning and the consequential tax relief will impact on cash flows and may help shape the overall viability of the installation for the owner and its stakeholders. The financier would be a key stakeholder and would be interested in forecast cash flow, including tax flows.