Renewable Heat Incentives
Four key areas for you and your clients to consider when looking into RHI financial scheme
The Renewable Heat Incentive scheme was set up in November 2011 to provide financial incentives (RHIs) to increase the uptake of renewable heat. The RHIs are payable for 20 years, to individuals or organisations who produce renewable heat, or biomethane.
The first annual report for the scheme was published on 1st July which shows that as at 31 March 2013 the scheme was growing quickly with 1,238 installations and had already paid almost £8m to participants. According to the report, by far the largest proportion of RHIs (92%) have been for “Solid Biomass Boilers”, of which most would be boilers burning wood pellets.
At present the initiative is for “non domestic” installations only, but it is worth pointing out that to fall within this definition heating only needs to be provided to a relatively small number of dwellings. For example we have experience of situations where an installation to cover only three dwellings have been deemed to fall within the scheme. It is understood that a domestic scheme will open in Spring 2014.
The payments are calculated by reference to the amount of heat generated and are payable quarterly. We have seen examples where the total quantum of payments over the 20 years in total is projected to comfortably exceed twice the amount of the initial investment. The payments are therefore highly attractive. Depending upon the way the business is organised it is likely that they will be subject to income tax or corporation tax if the boiler is run as a business.
It is possible (with care) to transfer the incentives to another entity so it is not necessarily critical to have the business structure in its final point at inception. Below are some specific pointers to areas where clients may seek your advice.
Finance Act 2012 restricted energy saving capital allowances by introducing CAA s45AA(1)(b), which is effective for expenditure incurred from 17 July 2012 (1 April or 6 April 2013 in Northern Ireland). On the other hand, normal capital allowances are usually available, but would normally fall within the “special rate” of 8% under the integral features rules.
Note that the RHI is not a subsidy aimed at the depreciation of equipment, so CAA s210, for example, is not in point. When the interaction of RHIs and capital allowances was being considered in the consultation prior to the Finance Act 2012 provisions the amount of AIA was £25,000. Following the increase to £250,000 this appears generous and may be restricted in future.
If using a corporate vehicle for the boiler it is worth giving consideration to the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), as running a boiler to provide heat is potentially a qualifying activity. Both these schemes have detailed requirements that will need to be satisfied.
Some organisations are approaching businesses offering to install biomass boilers and taking the RHI as part (or all) of the payment. This can lead to what seems like a very attractive offer, but with some work the client can often do better.
Woodlands are subject to a plethora of special tax rules. Most of these are not relevant to RHIs but it is worth reiterating that exploitation of woodlands is not a taxable activity, but it is worth noting the following two points:
- This does not apply to short rotation coppicing, which is treated as farming. Short being defined as high density trees harvested at intervals of less than 10 years.
- It is only the felling of the tree that is exempted. The process of turning the trees into pellets suitable for boiler is a taxable activity.
Under VATA 1994 Sch 7A, the supply of heat for domestic or charity use (other than in the course or furtherance of a business) can fall within the reduced rate. Note that the supply of hot water is treated as a supply of heat (Notice 701/16).
Wood burning boilers can fall within the reduced rate (Notice 708/6 paragraph 2.15). This includes the boiler itself, the installation costs, and any hopper to the extent that this is integral to the boiler. It does not include multi fuel boilers.
Specialist advice will be required in connection with VAT, but if the reduced rate is going to be claimed, the client will need to arrange this with the boiler supplier.
Finally remember that if part of the heating is going to be used for the clients own house there will be a restriction on input tax.
Graham Purvis is Tax Partner at UK200Group member firm Robson Laidler LLP