Tax Treatment of the Sale Back of Renewable Energy to the Grid
A letter from the London Society of Charted Accountants Taxation Committee to Anne-Marie Trevelyan the Minister of State for Business, Energy and Clean Growth on tax treatment of the sale back of renewable energy to the grid.
Dear Anne-Marie Trevelyan,
I am writing as Chairman of the Taxation Committee of the London Society of Chartered Accountants (LSCA). The LSCA is by far the largest of the 22 district societies affiliated to the Institute of Chartered Accountants in England and Wales (ICAEW) and has a membership of over 35,000 ICAEW members who live or work in London. Further details about the LSCA and the Committee are given at the end of this letter.
ICAEW and the LSCA have established “sustainability champions”, as part of which the LSCA has been considering possible tax and accountancy problems associated with the installation of Electric Vehicle Charging Points (EV CPs) in multi-occupancy buildings. This discussion has now been extended to the wider issue of renewable energy and what the Government can do to encourage the wider roll out of EV CPs and the use of renewable energy in general, together with some current issues and uncertainties that might discourage this in multi-occupancy properties.
On behalf of the LSCA as a whole, the Committee has been considering the position where individuals sell back their household generated (usually by solar panels) renewable energy electricity to the grid and the effects of whether or not this is treated as trading. More specifically, we have been looking at whether such sales by tenants’ associations and similar groups might threaten their tax-exempt status. As the London Society we are particularly interested in this issue because so many Londoners, probably the majority, live in flats.
Our understanding is that, at present, individuals who place solar panels on the roof and sell electricity back to the grid from those panels are not treated as trading, even though there is an argument that they are in fact doing so. Simply put, HMRC currently ignores the issue. However, the position becomes more complicated in the case of blocks of flats or multi-occupancy properties.
By the very nature of block solar and EV CP installations, there may be intra-block (e.g. association/ grid, association/tenant and resident/resident) energy transfers (aka trading?), especially peak/non-peak smoothing, and if this does not happen, the grid will suffer. If each player (grid, association & resident) was to be taxed as a micro-business, rather than mutual trading (whatever that is under tax law, since, like the association tax exempt status, it is currently ill defined) then the compliance cost of treating each and every battery as a business, would be immense.
One problem is that a Residents' Association is not a mutual trader if it sells electricity to outsiders such as the grid or utilities. However, HMRC does generally treat Residents’ Associations as tax exempt mutual traders, so we suggest that this could be extended to the more complicated energy relationship. Alternatively, residents could perhaps all make 100% FYA green energy claims as independent businesses, which would no doubt be difficult for HMRC to process.
As mentioned above, another question is “what is trading” (badges of trade) and what is mutual trading, as these terms are at present somewhat opaque? Although BIM24015 indicates that a company can have part of its trading 'mutual', it is probably likely that it will still be considered to be trading on the external sales and there is no way out unless an exception is made, at least up to some stated limit.
In order to prevent potential tax issues discouraging the wider rollout of renewable energy and EV CPS, it could have been made clear by extra statutory concession that no tax would be sought on feeding back into the grid, but we are aware that, some time ago, HMRC said they had no power to make ESCs, so stopped making them and are slowly legislating those that were in existence at the time.
In passing, we note that blocks of flats offer some very interesting problems in general. Latterly these include the position of “service charge trusts” in the context of Trust Registration. There is therefore room for a more far-ranging debate about blocks of flats in future, but we confine ourselves here to the particular issue under consideration.
In conclusion, in the absence of specific legislation, if the government is interested in having householders selling green energy back to the grid, then it needs to have a tax policy on it. We want this policy to be that HMRC will always disregard it. We therefore urge HMRC to confirm that no household would be considered as trading whether it is itself using solar panels and supplying any surplus energy to a main network, or whether it is part of a block of flats or flat management company doing so. We note that in the case of flats, the combined supply back of electricity to a network might exceed the £1,000 ‘non-taxable’ threshold, but we consider that it needs to be clear no tax will be sought on feeding back into the grid. We accept that to be treated in this way, any supply of surplus should be to the national grid.
In addition, for houses of multiple occupation (HMO) we believe that there should be tax neutrality if they invest in green equipment, so developers should get maximum write offs for tax on green installations.
If you would like us to expand on our points above or have any questions regarding our views, please do not hesitate to contact me.
Adrian Mansbridge BA FCA FCCA CTA, Chairman, LSCA Taxation Committee
About the LSCA and its Taxation Committee
The LSCA was formed in 1871 and is by far the largest of the 22 district societies affiliated to the Institute of Chartered Accountants in England and Wales (ICAEW). It has a membership of over 35,000, representing nearly one quarter of all ICAEW members, and also provides services for other ICAEW members who live or work in London. London members, like those of the Institute as a whole, comprise a mixture of those working in all sizes of practice and those working in a range of businesses both large and small, the public sector and third sector interests, or otherwise not in practice. They include many members operating at the heart of industry and commerce in the City of London, as well as those working in the largest accountancy firms, with a wide range of specialisms and expertise. The Taxation Committee reflects this diversity and knowledge. Members give their services to the Committee on a voluntary basis and in addition to their normal full-time employment.
The Committee responds to consultation and other papers on taxation matters issued by HM Revenue & Customs, HM Treasury and other bodies. It also makes detailed representations on issues such as the Finance Bill proposals. It provides the opportunity for lively debate and selects certain topics for broader discussion and publication to LSCA members. In addition, the LSCA organises an annual Breakfast event on the morning after the Budget to review the Chancellor’s main proposals, as well as holding other events on topics of current interest and importance.