Tax and Feed-in-Tariffs

Changes in tax legislation introduced from 1 April 2023 mean that charitable housing associations are now exposed to corporation tax on income received that relates to solar panels installed on their properties.

It is common for housing associations to install solar panels on the roofs of their tenanted homes as part of the decarbonisation agenda. Where solar panels were installed before 1 April 2019, the association could be entitled to receive Feed-in Tariffs (FITs), consisting of a ‘generation tariff’ (based on electricity generated) and an ‘export tariff’ (based on electricity exported into the national grid). Solar panels installed from 1 January 2020 could instead benefit from the Smart Export Guarantee (SEG), which pays an ‘export tariff’ only.

HM Revenue & Customs’ manuals provide guidance on the tax treatment of FITs (see BIM40510). In summary, this says that where the FITs are received in a business capacity, they will be taxed as a receipt of that business. Otherwise, the FITs will be taxed as ‘miscellaneous income’.

Most housing associations - and HMRC - have interpreted this guidance as meaning that FIT income received by housing associations should be taxed as ‘miscellaneous income’. This means that where FITs are received by a charitable housing association, they are subject to corporation tax because miscellaneous income does not fall within the tax exemptions applicable to charities.

Historically charitable housing associations have been able to offset their interest costs against the FIT income, so no corporation tax is payable.

However, due to changes introduced by Finance (No 2) Act 2023, it will not be possible to offset interest costs against FIT income from 1 April 2023. So from the year ended 31 March 2024, many charitable housing associations are facing exposure to corporation tax on their FIT and SEG income. Some may benefit from the ‘small trading exemption’ which, broadly, would exempt the income from corporation tax if the gross income is less than £80,000, but for others the potential tax exposure is significant and made worse with the main rate of corporation tax increasing to 25% from 1 April 2023.

In principle, it should be possible for a charitable housing association to transfer entitlement of the FIT/SEG income to a trading subsidiary, which would then donate its profits to the charitable housing association. However, this is far from straightforward, potentially involving leases of roof space to the subsidiary, which could bring with it the need for consent from lenders and the regulator, as well as dealing with the necessary administration for the energy provider.

On behalf of the NHF, tax experts RSM have asked HMRC to reconsider the application of BIM40510, in particular whether the FIT income can form part of the income received by a housing association in the course of its property business. If that were the case, the FITs would fall within the corporation tax exemptions applicable to charities.

VAT treatment - generation tariff

Under the FIT scheme, a generation tariff is paid for each unit of electricity generated. As there is no supply for consideration, the generation tariff payments fall ‘outside the scope’ of VAT and as a result it shouldn’t be accounted for. This also means there is no requirement to enter net sales or purchases within VAT returns.

VAT - export tariff

Under both the FIT and SEG schemes, an export tariff is paid for each unit of electricity that is exported to the national grid. This is a supply for consideration, meaning the export tariff is subject to VAT but is recoverable subject to the normal rules being met.

RSM is a leading provider of audit, tax and consulting services, with around 3,800 partners and staff in the UK. We're working with our tax advisors RSM to help shape government policy on taxation as it affects the sector and to keep housing associations informed of key issues.