Minimising business rates impact for rooftop solar

installations in England and Wales

SPV toolkit Draft document v2.8

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Objectives • To explain why there is a problem with business rates for commercial rooftop solar

• To understand how business rates for solar are determined

• To acknowledge the legislative asks to resolve the problem

• To explain how to mitigate the business rate increase through changing the legal structure of solar panel ownership

• To explain how existing assets can utilise this new legal structure to mitigate the business rate increase

Disclaimer:

The STA does not issue legal advice. The content of this document is based on our understanding of the business rates and tax legislation and should therefore be

considered as guidance only.

Purpose of this document

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For self-owned PV assets where generation is consumed on-site, business rates bills will rise by a factor of almost eight if the new rules are left unchanged

• Previously the Valuation Office Agency (VOA) used a single method for valuing solar at a rateable value of £8/kW across all solar assets (E&W; NOT in Scotland)

• Following the April 2017 revaluations, solar now has two valuation types:

1. Mainly Export – e.g. where assets e.g. solar farms, third-party rooftop installs, or installs set up within a special purpose vehicle (SPV), export the energy to a customer or a third party via a power purchase agreement (PPA)

2. Mainly Self Consumption – e.g. supermarket, where the owner of the installation uses the electricity for self-consumption

• In general, ‘mainly export’ valuations have fallen in line with solar installation costs and subsidy, i.e. the asset value has fallen

• In contrast, ‘mainly self-consumption’ valuations have gone up by 6-8 times, as the method and parameters used to calculate the rateable value are fundamentally different

• Solar on schools, hospitals and defence premises under this method go up by 3-4 times

• In addition, installations smaller than 50kW which used to be exempt from business rates as ‘microgeneration’ will now be subject to the rates. However in Scotland microgeneration is permanently exempt

• The points above are a simplified overview. The detail around business rates is complex.

Why is there a problem with business rates for rooftop solar?

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Confirmation of calculation for mainly self-consumption

Hi Nick I can confirm that for 2017 Rating Lists: If the PV is primarily providing power to the hereditament rather than exporting, then it will be valued on a Contractors Basis using the following capital values - <4kw £1,400/kw installed capacity 4-150kw £1,250/kw installed capacity >150kw £1,100/kw installed capacity Rateable values are thereafter calculated simply by applying the appropriate statutory decapitalisation rate to these capital values. These rates are as follows – England 4.4% (2.6% for educational, healthcare or defence) Wales 3.8% (2.1% for educational, healthcare or defence) Hope that helps. Kind Regards Bob Bob Prescott MRICS | Utilities Specialist | National Specialists’ Unit | Valuation Office Agency (VOA) Crown House | 60 Crown Street | Halifax | HX1 1HY |

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Mainly Export – would typically apply to utility-scale sites

• There are multiple calculation inputs including capex, subsidy level, date of installation, risk factors and hypothetical ownership ‘split’ factors. However as these valuations have now been agreed with the VOA, and there is a detailed list on the STA website, we will not be covering this

• Note that using the ‘mainly export’ valuation is the desired route for all commercial solar rooftops as the ‘mainly self-consumption’ valuation for NEW installations would otherwise be as much as 1,100% higher

Mainly Self Consumption

• This calculation is very basic and does not consider multiple inputs e.g. asset value or subsidy

• From April 2017, installations will be calculated based on the capital cost assumption for each of three bands of install

• Example: 100kW x £1,250/kW x 4.4% = £5,500

• The ‘decapitalisation rate’ in the formula above is 2.6% for schools, hospitals and defence and 4.4% for all other installations (Note Difference for Wales)

How are solar business rates calculated?

System size Capital cost assumption (£/kW)

<4kW £1,400

4-150kW £1,250

>150kW £1,100

Capital cost

Installation size

Decapitalisation rate

Rateable value

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Calculations for OLD installations (installed prior

to 1st April 2017)

Self Consumption

Mainly Export

System Size kW Pre-2017 01 April 2017 * 01 April 2017 Difference

10 £0 £550 £74 743%

30 £0 £1,650 £222 743% School 30 £0 £975 £222 439%

50 £0 £2,750 £346 795% 100 £800 £5,500 £488 1127% 250 £2,000 £12,100 £1,390 871%

500 £4,000 £24,200 £2,485 974%

2000 £16,000 £96,800 £9,940 974%

Decapitalisation Rates Businesses in England 4.40% Schools, hospitals, defence 2.60% Wales …… 3.80%/2.10%

Multipliers Standard Non-Domestic Multiplier 0.479 Small Business Non-Domestic Rating Multiplier 0.466

Examples below are for England. Wales are very similar, Scotland - waiting for self consumption data

* See Microgeneration exemption rules in SI 2332 – exemption is “between the date of installation and the first five-yearly revaluation of non-domestic” – In other words until the next ratings list. A microgen install on the 21st March 2017, would only have 10 days of exemption.

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Calculations for NEW installations (installed from

1st April 2017)

Self Consumption

Mainly Export

System Size kW Pre-2017 01 April 2017 * 01 April 2017 Difference

10 £0 £0 then £550 £74 743%

30 £0 £0 then £1,650 £222 743% School 30 £0 £0 then £975 £222 439%

50 £0 £0 then £2,750 £346 795% 100 £800 £5,500 £488 1127% 250 £2,000 £12,100 £1,390 871%

500 £4,000 £24,200 £2,485 974%

2000 £16,000 £96,800 £9,940 974%

Decapitalisation Rates Businesses in England 4.40% Schools, hospitals, defence 2.60% Wales …… 3.80%/2.10%

Multipliers Standard Non-Domestic Multiplier 0.479 Small Business Non-Domestic Rating Multiplier 0.466

Examples below are for England. Wales are very similar, Scotland - waiting for self consumption data

* See Microgeneration exemption rules in SI 2332 – exemption is “between the date of installation and the first five-yearly revaluation of non-domestic” – i.e. until the next ratings list. A microgen install on the 1st April 2017, would have ~ 5 years of exemption (i.e. next rating list).

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Policy Update

• Mainly export installations have been agreed with the VOA and we have a Memorandum of Agreement in place with all FiT and RO installations listed by year of install. The Scottish Assessors Agency (SAA) have agreed very similar rateable value to England and Wales

• We have been lobbying hard to make microgeneration permanently exempt, as well as changing the legislation to ensure solar panels and cells are classed as ‘excepted plant and machinery’, which we understand would result in all solar having the same rateable whether for export or self-supply

• As at the beginning March 2017, we still have not had clarity on the outcome

Is there a solution?

• Yes!

• By setting up solar installations under an SPV and providing a PPA to agree to export and ‘sell’ the electricity to a consumer (i.e. back to the tenant)

• Following advice from independent business rates experts as well as the VOA, this would result in the solar installation being treated for business rates under the mainly export valuation

• The ‘STA toolkit’ will be discussed in the following slides

What is the STA doing?

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The steps set out in this document are recommended to mitigate paying the higher level of business rates which take effect 1 April 2017

Why will changing the legal ownership structure help?

• The distinction between the two valuation methods relies on whether the power generated is mainly being consumed by the ‘rateable occupier’ of the panels (essentially the company that owns/operates the panels) or whether it is mainly being exported to the grid (or supplied to a third party legal entity)

• The rating system treats a special purpose vehicle (SPV), i.e. a company incorporated for a specific purpose, as a rateable occupier. Therefore by incorporating an SPV and transferring your solar asset into that SPV, the SPV is deemed to be ‘exporting’ power to the tenant, and is liable for the lower solar valuations

• In addition, an SPV would qualify for small business rates relief provided its rateable value is less than £12-15,000 (equivalent to around 2MW of installed capacity), and therefore may pay no business rates at all.

• This approach has been understood following discussions with the VOA

Questions

• If you have any questions on this document please email Cameron Carswell at the Solar Trade Association (ccarswell@solar-trade.org.uk) or call (0203 637 2948)

• This document is purely for guidance and professional expertise should be sought on tax and legal matters

Toolkit summary

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Contents

Section Page number

Setting up a new SPV 11

VAT grouping 12

SPV takes ownership of PV system 13

Setting up a power purchase agreement (PPA) 14

Corporation tax 15

If you are not VAT registered 16

Summary 17

Frequently asked questions 18

The SPV process for existing PV installations 19-22

Bird and Bird PPA presentation 25-31

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• You incorporate a new, wholly-owned company (SPV)

• You can incorporate the SPV yourself through Companies House (it takes 24 hours to process an application for a cost of £12)

• Alternatively, you can pay a formation agent to handle the process for you

• The process is straightforward: you must specify the new company’s address (which can be the same as your existing address), its directors and shareholders

1. Setting up a new special purpose vehicle (SPV)

Your organisation

New SPV

Your organisation

BEFORE AFTER

100% ownership

Setting up an SPV is an essential part of the process but should be quick and low-cost. The SPV structure needs to be set up simultaneously when acquiring the new solar panels.

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If you have an existing VAT group

• If you already have a VAT group, the SPV must be added, via VAT forms VAT50 and VAT51. These forms can be filled out online or by post.

If you have an existing single VAT registration

• If you currently have a single VAT registration, you should create a new VAT group

If you are not VAT registered

• See separate slide – ‘if you are not VAT registered’

2. Bringing the SPV into your VAT group

New SPV

Your organisation

BEFORE AFTER

100% ownership

The new SPV should be brought into your existing VAT arrangements. If you do not VAT register the SPV then VAT at 5% will be chargeable on electricity sales from the SPV, and VAT on any costs associated with the panels (e.g. maintenance) will not be recoverable.

New SPV

Your organisation

100% ownership

Existing VAT group/single registration

New VAT group

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• The SPV must be the legal owner of the new solar panel system

• This has no bearing on where the panels are physically installed; it is purely a question of legal ownership

• The new SPV will then ‘sell’ electricity to your organisation via a power purchase agreement (see next slide)

3. SPV takes ownership of solar panels

AFTER

PV system New SPV

Your organisation

BEFORE

100% ownership

New SPV

Your organisation

100% ownership

Regardless of which of your corporate entities pays for the solar panels, the new SPV must be the legal owner of them

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3. Setting up a power purchase agreement (PPA)

AFTER

PV system

New SPV

Your organisation

BEFORE

100% ownership

New SPV

Your organisation

100% ownership

PV system

• It is essential to demonstrate that the SPV ‘exports’ (sells) electricity to a different legal entity

• Given that you will own the SPV, it is purely a question of internal accounting; you will not need to transfer cash back and forth

• The price per kWh of electricity will need to be ‘commercial’ i.e. it cannot be free

Supply of electricity

Notional payment £

Your new SPV ‘exports’ (sells) the generated electricity at a commercial rate

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4. Corporation tax

• An online corporate tax return will need to be prepared for the SPV

• Because the SPV is selling electricity, it will generate taxable income (even if no cash is transferred)

• However because your organisation will have a corresponding ‘loss’ from paying for the electricity from the PV system, the net tax effect should be zero. This can be dealt with via ‘group relief’ on your tax return

• The SPV will also be able to deduct capital allowances on the PV system from its taxable profit

New SPV

Your organisation

100% ownership

PV system

Supply of electricity

Notional payment £

The corporation tax impact of the SPV structure should be zero provided the correct filings are made

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• If you are not already VAT registered, supplies from the SPV may take you over the VAT registration threshold (currently £83,000 over a 12 month period). ‘Supplies’ for these purposes means the electricity sold by the SPV.

• Electricity sales from the SPV will count towards the VAT registration threshold, even though they stay within your group

• If you remain under the VAT registration threshold, you are not obliged to register but may wish to do so anyway in order to recover VAT on costs associated with the solar panels (e.g. maintenance costs)

If you are not VAT registered

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Summary

SET UP NEW SPV 1

BRING SPV INTO VAT GROUP 2

SET UP POWER PURCHASE AGREEMENT (PPA) 3

CORPORATION TAX FILINGS 4

APPLY FOR SMALL BUSINESS RATE RELIEF 5

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Frequently asked questions

Question Answer

Is setting up an SPV with a PPA seen as tax avoidance?

We have spoken with the VOA and other Government departments and they are aware that having a different legal ownership structure with solar is very common e.g. the landlord/tenant relationship; setting up third party funding; provision of PPA’s etc.

How do the VOA know whether I have solar panels?

Through the recent valuation process, businesses will have been asked to declare if they have solar installed. Owners of solar installed prior to April 2017 will be liable for business rates from 1st April going forward (we are getting this confirmed by the VOA)

How do I know what method is being used to rate my solar?

Sometimes the rateable value will be listed on your business rate statement under ‘plant and machinery’, but in many cases you will need to undertake a ‘check, challenge appeal’ by writing to the VOA

Why should I check what I’m being charged

Unfortunately the VOA and the local councils will not know the legal structure of your solar installation unless they are notified – don’t assume! Considering an installation could attract a rateable value of ~1200% difference between the two valuation outcomes, we advise clarification

Do I need to notify the VOA of my SPV and PPA arrangement?

You should notify the VOA of the arrangement so that the rateable value of your property is correctly valued using the ‘mainly export’ method. You can check these values against the table on our website.

Does this structure work for existing systems?

Yes you can convert your existing solar installation into an SPV and a PPA then follow the check, challenge appeal process to notify the VOA of the change in structure. See our separate document on existing installations

What is the >50% rule? For self-owned, self consumption solar, if you have a metered system and can prove that >50% of your generated solar is exported then your system should be valued using the ‘mainly exported’ method

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• You incorporate a new, wholly-owned company (SPV)

• You can incorporate the SPV yourself through Companies House (it takes 24 hours to process an application for a cost of £12)

• Alternatively, you can pay a formation agent to handle the process for you

• The process is straightforward: you must specify the new company’s address (which can be the same as your existing address), its directors and shareholders

1. EXISTING INSTALLATIONS - Setting up a new special purpose vehicle (SPV)

Your organisation

New SPV

Your organisation

BEFORE AFTER

100% ownership

Setting up an SPV is an essential part of the process but should be quick and low-cost. The SPV structure needs to be set up simultaneously when acquiring the new solar panels.

PV system PV system

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If you have an existing VAT group

• If you already have a VAT group, the SPV must be added, via VAT forms VAT50 and VAT51. These forms can be filled out online or by post.

If you have an existing single VAT registration

• If you currently have a single VAT registration, you should create a new VAT group

If you are not VAT registered

• See separate slide – ‘if you are not VAT registered’

Once the new VAT group is set up, ownership of the PV system should be transferred to the SPV

2. Bringing the SPV into your VAT group

New SPV

Your organisation

BEFORE AFTER

100% ownership

The new SPV should be brought into your existing VAT arrangements. If you do not VAT register the SPV then VAT at 5% will be chargeable on electricity sales from the SPV, and VAT on any costs associated with the panels (e.g. maintenance) will not be recoverable.

New SPV

Your organisation

100% ownership

Existing VAT group/single registration

New VAT group

PV system

PV system

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3. Setting up a power purchase agreement (PPA)

AFTER

PV system

New SPV

Your organisation

BEFORE

100% ownership

New SPV

Your organisation

100% ownership

PV system

• It is essential to demonstrate that the SPV ‘exports’ (sells) electricity to a different legal entity

• Given that you will own the SPV, it is purely a question of internal accounting; you will not need to transfer cash back and forth

• The price per kWh of electricity will need to be ‘commercial’ i.e. it cannot be free

Supply of electricity

Notional payment £

Your new SPV ‘exports’ (sells) the generated electricity at a commercial rate

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4. Corporation tax

• An online corporate tax return will need to be prepared for the SPV

• Because the SPV is selling electricity, it will generate taxable income (even if no cash is transferred)

• However because your organisation will have a corresponding ‘loss’ from paying for the electricity from the PV system, the net tax effect should be zero. This can be dealt with via ‘group relief’ on your tax return

• The SPV will also be able to deduct capital allowances on the PV system from its taxable profit

New SPV

Your organisation

100% ownership

PV system

Supply of electricity

Notional payment £

The corporation tax impact of the SPV structure should be zero provided the correct filings are made