Charities interested in feed-in tariff's for small-scale renewable electricity-generating technology need to be aware of the hidden direct tax liability.

April 2010 saw the introduction of feed-in tariffs (FITs) as a new financial incentive to encourage the take up of small-scale renewable electricity-generating technology in the UK. The FITs comprise two elements, a generation tariff which is receivable in respect of electricity generated and an export tariff which is receivable for electricity sold back into the wider energy market.

Charitable organisations have been able to benefit from the installation of solar panels on their properties and many have jumped at the chance. However, they may be unaware of a hidden direct tax liability.

The basic tax treatment for both generation and export tariffs will depend on the exact nature of the receipt in the hands of the recipient. In circumstances where the tariff is received in a business capacity, the tariff will be taxed as a business receipt under normal tax principles. This treatment is to be contrasted with that of an individual who has installed solar panels on their domestic roof in which circumstances HMRC accepts that no income tax liability exists, thanks to a specific exemption.

However, the position for charitable organisations is not so clear cut. The receipt of FITs is not regarded as being part of a charity’s primary purpose trading activity and, therefore, is not exempt from corporation tax under s.478 CTA 2010. HMRC does not accept generally that a charity can receive FIT income as an exempt income source but rather that any tariff income will fall to be taxed as miscellaneous income under the provisions of s.482 CTA 2010.

Tax exempt limit inadequate

Given the significant capital investment involved in acquiring and installing solar panels, charities are only going to consider such an investment on a reasonably large scale where they can generate significant tariff income. The annual tax exempt £50,000 limit for miscellaneous income (if not already used up) is likely to prove wholly inadequate, leaving the charity with income subject to corporation tax.

To compound the problem, many solar panel installation projects have been financed by third-party borrowings. When computing the level of miscellaneous income, no deduction can be taken for any interest costs, effectively meaning that the charity is taxed on the ’gross’ tariff income.

Certain charities have sought to route such income through a wholly-owned trading subsidiary. This option is not without practical difficulties as the trading subsidiary would need to be the entity owning the solar panels and will require a licence from the charity to occupy the roof space. There have also been some reported instances of banks being unwilling to lend to the trading subsidiary in such circumstances.

Paul Knight is head of not-for-profit tax at BDO and Sarah Campbell is tax director at PKF