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Capital Investment in Solar Energy Finally Makes Financial Sense


Solar Panels on roof of commercial building

The increase in energy prices has prompted more and more businesses to consider whether it makes sense to invest in solar panels. The practicalities are simple enough. All that is required is to determine whether there is sufficient roof space on the commercial premises to start generating solar energy.

Owing to advancements in solar technology over the past decade, not only are solar panels much more efficient than they used to be, the costs have also fallen significantly, leading to an increase in the number of businesses installing them.

Although costs have fallen, they are still a significant barrier for a lot more businesses who might otherwise have considered solar panels as an option. Costs notwithstanding it would previously have taken many years to recoup the initial outlay and see the true benefits of free energy.

This is no longer the case.

Given the recent energy price rises, it is time to consider seriously investing in solar. It now makes much more financial sense. Obviously, cost is not the only factor in deciding to move to renewable energy. By generating their own solar energy, businesses are demonstrating their green credentials.

Does installing solar panels for businesses make financial sense?

By way of an example, let’s take a medium sized business that uses 40,000 KWh of electricity per year.

Prior to the recent energy price rises a typical business would have paid approximately £0.17 per KWh (plus daily standing charge). As a result, it would pay approximately £7,000 per year for electricity.

Under the current increased rates, the same business would be paying approximately £0.45 per KWh (which is still rising), meaning that it would pay in excess of £18,000 per year for electricity.

A business using about 40,000 KWh per year would potentially require a solar panel system costing approximately £60,000.

Prior to the energy price rises, that would have meant a return on investment in 8.6 years (a timeframe that could be off-putting). With the current costs of electricity, an investment of £60,000 would give a return in approximately 3.3 years. After this, in essence electricity usage is free, saving the business £18,000 annually (depending on the electricity costs at the time)

Are there any tax benefits for businesses installing solar panels?

Currently, the cost of installation of Solar Panels qualifies for the Annual Investment Allowance (AIA), meaning that a business can claim 100% of the costs of equipment and installation, up to the amount of £1 million against it’s taxable profits for the year.

Should the business have already reached it’s £1 million limit in the financial year, it could claim a 50% special rate First Year Allowance instead.

(As of the Chancellor’s 2023 Spring Budget the AIA amount has now been permanently set at £1 million)

Deciding to install solar power needs to be carefully thought out and costed. Given the current energy costs and the tax breaks available the benefits of solar are attractive.

One thing to certainly get advice on is whether you require planning permission to install solar panels.

In general, installing solar on the roof of a building doesn’t require planning permission providing it does not increase the height of the top line of your roof. However if the premises fall within an area of conservation, you will most likely require planning permission.

If you are planning on installing solar panels in the grounds of your property as opposed to the building itself, it is reasonably certain that you will require planning permission. It is always advisable to seek specialist advice on whether you require planning permission or not.

Engage with an Accountant

You should always speak to an accountant prior to any capital investment in your businesses. Accounting procedures surrounding Annual Investment Allowance can be complex.  You should engage with a reputable firm of accountants who have detailed knowledge of legislation, and the experience in dealing with it. Find out more about the benefits of using a Chartered Accountant.

For further information and guidance on Capital Allowances such as Annual Investment Allowance and Super-deductions contact us here at Friend Partnership.

Friend Partnership is a forward-thinking firm of accountants, business advisers, corporate finance and tax specialists. We act for entrepreneurial businesses and successful individuals on a national & international basis.

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