Renewable Energy Installations and Business Rates liabilities | Deloitte UK has been saved
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Surging investment into UK renewable energy installations has been well documented, a trend which is destined to continue under the Government’s Ten Point Plan for a Green Industrial Revolution.
The Government also announced that it would double the amount of renewable energy it will subsidise in 2021 and agreed to include onshore wind and solar for the first time since 2015. There will be a competitive auction for the subsidy contracts to be held in late 2021 which is anticipated will further lead to a significant increase in investment in new solar and onshore wind projects.
The physical nature of much of this investment is however raising an ever more common question by investors…. “What will my liability for business rates be?”
Valuation models used to assess renewable installations have been arrived at from existing approaches used for other classes of properties and their application is evolving as more information is brought forward. Consequently, the Valuation Office Agency (VOA) - the Government Agency responsible for the assessment of Business Rates is currently dealing with significant backlogs of work in this area and it often takes considerable time before an assessment is entered in the current 2017 Rating List. Notwithstanding, when the entry is made the liability is then backdated to the commencement of power generation so it is likely that significant backdated liabilities could have accrued. Investors would therefore be well advised to obtain estimates of such liabilities as early as possible and make provisions where necessary.
The Business Rates system has featured regularly in the headlines across many sectors recently – not least in the world of retail. That focus will undoubtedly continue as absolutely every Rating assessment is reviewed as part of a planned and periodic revaluation exercise. Interestingly the date against which all values will be assessed has just passed – 1 April 2021; with the new Rating List, adopting these values, effective from 1 April 2023.
In addition to the Revaluation, the Government has initiated a ‘Fundamental Review’ of Business Rates as it seeks to address and tackle the perceived weaknesses and inequities in the prevailing system. One area that is being closely looked at is the treatment of assets used for Renewable Energy. Reporting on the Fundamental Review is not due out until the Autumn and in all likelihood the adoption of any changes will take years rather than months to implement. So, whilst we await the announcement of changes with interest, it is important to address the valuation criteria and consequential liabilities created, through the current system.
In the eyes of the Valuation Office, Renewable Energy installations primarily comprise wind, solar and battery storage. Offshore wind farms are not liable for Business Rates, only the electrical intakes at landfall will have a liability; however onshore wind farms are liable. To explore this liability in more detail it is necessary to consider an obscure piece of legislation known as the “Valuation for Rating (Plant and Machinery) regulations”. Under these regulations items of plant must be specifically named to become liable for Business Rates. As “storage batteries”, “wind turbines” and “solar cells” are named assets, they are therefore liable. However, under subsequent amendment regulations, where power is generated for “sale to consumers”, the associated plant becomes exempt. This can produce somewhat unexpected results – for instance, where solar panels installed on a shop roof for self-consumption are liable for Business Rates, the power, if sold on, is not. Looking at key installation categories in turn:
If self-consumption (typically solar panels installed on roofs of supermarkets) then solar panels are rateable and the VOA will use a cost related basis which typically will give a liability of 10x that where the majority of power is for sale to consumers and the solar panels are not rateable. As a result of this, some occupiers have established standalone companies to take responsibility for generating and selling the power back to the occupational entity in order to benefit from a lower assessment.
The issue of self-consumption is not so much of a problem with onshore wind farms as the vast majority feed their power into the grid and satisfy the onward sale test. Accordingly, the turbines themselves are not liable for Business Rates and any assessment is restricted to the site and associated infrastructure. The VOA has a valuation model it uses for these sites based on the site’s receipts and outgoings around the valuation date.
Increasingly large amounts of capacity are currently being installed in battery storage sites. These are relatively new pieces of infrastructure and currently the VOA has brought very few into assessment. To date the VOA has adopted a cost-based valuation – although again, the batteries are not rateable as the power is for sale to consumers. The valuation therefore includes the value of land and cost of the control room, plus enclosures for the batteries and cost of grid connection plus security fencing, etc.
The consultation paper for the Fundamental Review included a question on the Business Rates Plant and Machinery regulations. The recently published Interim Report of the review gave the following summary of the submissions in response to this question: “The most common response was in respect of Green Energy with a call by over 40% of all respondents for either temporary or permanent exemptions for the various forms of green energy generation.” We will have to await the final report of the review, due to be published this autumn. It is expected that the self-consumption anomaly will be rectified and also in order to encourage investment in new green energy installations it is likely that a temporary exemption will be introduced for the first few years of operation for new installations.
Investment in renewable energy continues to boom and is likely to accelerate as the race to decarbonise speeds up and first-generation equipment is replaced. When it comes to business rates investors face the dual challenge of a complicated and snail-paced system where it is difficult to estimate liability coupled with an impending major overhaul of the system. Pressure is building on government to “fix the roof” and it remains to be seen whether they will opt to recover a greater proportion of the income generated via changes to the business rates system over the next few years. For now, investors need to ensure they have a detailed understanding of the current system to enable accurate forecasts for the next couple of years. Beyond that investors need to be prepared for change with the likelihood that the tax burden will rise as the renewable energy industry matures.
Philip leads Deloitte’s UK Real Estate Valuation business within Real Assets Advisory and is a member of it’s cross-border EMEA valuation team. Philip has over 20 years of real estate experience, advising clients in respect of both traditional valuation and appraisal situations including financial reporting, loan advisory and acquisition due diligence as well as participating in multi-disciplinary teams delivering wide ranging business advisory services – notably to the Financial Services sector in connection with major restructuring, assurance and M&A activities. Having led the Valuation business in the UK for 10 years, Philip has overseen a period of considerable evolution in the delivery of valuation advice. In addition to providing opinions of value, he and his team have refined their offer to bring a wealth of specialist insight to broader business challenges, working seamlessly alongside colleagues from across Deloitte’s service offer. Such situations range from providing buy and sell-side advice on loan portfolios to succinctly identifying key real estate risks within an occupied or investment portfolio subject to a corporate transaction; and from supporting statutory Audit teams in reviewing the robustness of valuations to complementing strategic advice concerning valuation processes and controls within a Risk Advisory context. The approach is one which places the challenges of clients at the centre. Philip is a regular contributor to valuation profession debates. He has also played a significant role in raising awareness of the impact of Sustainability issues on the Valuation profession and values being reported; chairing and participating in working groups for the RICS, Investment Property Forum and the UK Government.
Edwin is a Partner within our Real Assets Advisory business with over 25 years’ commercial property experience.He leads on valuation and assurance across the UK regional network and frequently works with colleagues in the US and EMEA. Edwin has been involved with a wide range of due diligence and assurance roles and his clients are spread across the private and public sectors. Edwin is an active member of the IPF, a Chartered Surveyor, Registered Valuer and associate member of the IRRV. He has authored the annual Birmingham Crane Survey in recent years, is a respected speaker on commercial property markets and has been interviewed on national and local TV and radio.
Yee is an Assistant Director within the Development and Assurance Team. He is an RICS Chartered Surveyor with a specialist in Non-Domestic Rating. Yee has gained considerable experience in providing specialist rating advice on assets such as hospitals, health centres, universities, schools and telecommunication sites, where is has in-depth knowledge of the contractors test valuations. Yee has recently advised a Client and prior agreed their rating assessment with the Valuation Office Agency on a new District Heating Network system. Most recently Yee has advised various NHS Trust’s producing saving circa £15m over the life of the 2017 Revaluation.
Gerald is a Chartered Surveyor and also hold the RICS Rating Diploma. He worked in the VOA from 1975 up to 2015 when he joined Deloitte as a salaried consultant working 15 hours a week. He has extensive experience of the valuation of specialist properties for business rates purposes. He has dealt with Airport valuations over the last 25 years including Heathrow and Gatwick, also he led a team in the VOA that dealt with utility valuations including power generators and telecommunication assessments. He has also been responsible for the valuation of sports stadia, railway properties, museums and art galleries, arena's, conference and exhibition centres and leisure properties generally (including the London Eye!) he has recently been involved in advising clients about their Business Rates liability for photovoltaic cells installed on the roofs of shops and also for battery storage sites and wind turbines. In addition, he has also been responsible for advice in respect of fibre optic telecommunication installations.