Super-deduction on solar panels

Tax Question

Can my limited company obtain the 130% super-deduction on solar panels?

Tax Answer

Capital Allowances – General

Capital allowances are available where ‘a person carries on a qualifying activity and incurs qualifying expenditure’ (CAA 2001, s11(1)).

Generally, expenditure is considered “qualifying expenditure” where:

  • it is capital expenditure, and
  • it is incurred on plant or machinery, and
  • it is for the purposes of the qualifying activity, and
  • the person incurring the expenditure owns the plant and machinery as a result.

So, one first needs to consider whether the expense incurred by the company is revenue or capital in nature. Where the expenditure is capital in nature, and is incurred on a qualifying activity (as defined at CAA 2001, s15(1)), then attention needs to be given to the remaining legislation from Chapter 3 CAA 2001 onward to determine which capital allowance, if any, is available.

Solar Panels

When discussing solar panels, one might first wonder whether CAA 2001, s33A(5)(a) applies, such that solar panels are treated as an integral feature being part of ‘an electrical system’. While this may be true, it is of little relevance, as another part of legislation takes precedence.

Instead, of primary concern is CAA 2001, s104A(1) which states, ‘”Special rate expenditure” means… expenditure incurred on or after the third relevant date on the provision of solar panels.’ The ‘third relevant date’ is given by CAA 2001, s104A(3A)(a) as ‘1 April 2012’.

Thus, where a company incurs expenditure on solar panels on or after 1 April 2012, it is treated as special rate expenditure by statute.

130% Super-Deduction

The conditions for the 130% super-deduction allowances are set out at FA 2021, s9(2), and are as follows:

  1. it is incurred on or after 1 April 2021 but before 1 April 2023,
  2. it is incurred by a company within the charge to corporation tax,
  3. it is expenditure on plant or machinery which is unused and not second-hand,
  4. it is not within any of the general exclusions in section 46(2) of CAA 2001,
  5. it is not special rate expenditure, and
  6. it is not expenditure on the provision of plant or machinery for use wholly or partly for the purposes of a ring fence trade.

Subsection (2)(e) specifically prohibits special rate expenditure from being eligible, therefore the 130% super-deduction allowance cannot be obtained on solar panels.

Other Allowances

However, it is of course still possible that the solar panels qualify for the 100% Annual Investment Allowance (AIA).

Or failing that (e.g. where the AIA has been fully utilised against other qualifying plant and machinery in the period), the 50% super-deduction allowance may be available. However, it would need to be demonstrated that the solar panels are not ‘long-life assets’ excluded by virtue of ‘General exclusion 5’ of CAA 2001, s46(2). A long life asset is defined at CAA 2001, s91 as an asset that, ‘if new, can reasonably be expected to have a useful economic life of at least 25 years’. HMRC’s opinion on this matter is that solar panels generally do have a useful economic life of more than 25 years (CA22335), but it would be prudent to check with the manufacturer in each case. If the expected economic life per the manufacturer is less than 25 years, the 50% super-deduction will be available.

Otherwise, the annual 6% writing down allowance for special rate items will be the only allowance available to claim.

Exclusion – Dwelling Houses

It is worth nothing that that the above allowances are subject to the exclusions at CAA 2001, s35, which specifically prohibit any capital allowances being claimed where the plant or machinery will be used in a dwelling-house. This essentially prevents capital allowances from being claimed on assets used in a company’s residential property business, other than where the business meets the conditions to be treated as a Furnished Holiday Letting (FHL) (CTA 2009, ss. 265 – 268).

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