Renewable energy firms: don’t get caught out by new tax rules

Brexit, and the resulting lack of announcements about future subsidies which have to date supported much of the renewable energy sector, are causing a period of inertia and stalling many new projects.

The industry is also facing a number of other challenges around new tax laws.

The new Transactions in Land legislation could result in many large scale projects being subject to the higher tax charge of income tax rather than capital gains tax.

It is a generally understood principle that when land, buildings or shares are disposed of, it is a disposal of a capital asset, and it is expected to pay lower rates of capital tax. However, since last summer a new version of the Transactions in Land legislation has been in place, where there is a likely liability to pay income tax of up to 45% on the profit instead.

In corporate environment the repercussion can mean that a company selling its subsidiary who thought it would pay no corporate tax on the profits, using substantial shareholding exemption (SSE), would instead be liable to pay 19%.

The breadth of the legislation is potentially far reaching, from at one end the individual selling off a small paddock next to their house for housing, to a large scale property developer owning a special purpose vehicle (SPV) containing significant options over land, and the renewable energy generation business built and sited in a privately owned SPV or as a subsidiary of another company.

There are four conditions which are widely accepted and if any one of these conditions is met then the new legislation comes into play.

Condition A The main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land.   This condition relies on the intention. I.e. what was the original intention when the land was acquired; did the intention change, if so when?

 

Condition B The main purpose, or one of the main purposes, of acquiring the property deriving its value from land was to realise a profit or gain from disposing of the land. The ‘property’ deriving its value from land is frequently shares, so this covers the property held in the SPV situation. Where at least 50% of the value in the shares is derived from the underlying land value, people are likely to be caught.

 

Condition C The land is held as trading stock. Where land is held as a fixed asset in the accounts this would be an indication of the intention and purpose.

 

Condition D Where the land has been developed, the main purpose of developing the land was to realise a profit or gain from the disposal of the land.    

 

There is both case law and established guidance on what constitutes ‘a main purpose’ which three of these conditions hinge upon. There can also be situations from when the asset is acquired with the intention being to hold it as an investment, but then the intention changes.

Here the profit relating to the period from when the intention changed will be caught. In many property-based transactions there are additional consultancy services or conditions to be provided by the vendor, which can be problematic under the new legislation. The scope and nature of disposals to third parties needs careful consideration.

The sector needs a new government subsidy announcement to gain serious momentum in the areas of on shore wind and solar.

In summary, if an owned property is being changed, or the intention for it is changing, or the purchase of land for development, or development of existing land or structures is being considered, seek immediate advice from a tax accountant at the earliest stage.

Please feel free to contact me for advice: 01604 624011 / Rachel.nutt@mhllp.co.uk

Photo by Ian D

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Rachel Nutt

Rachel Nutt

Tax partner and head of renewable and sustainable energy, MHA MacIntyre Hudson

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