Thinking renewables: anaerobic digestion

Thinking renewables: anaerobic digestion

Thinking renewables: anaerobic digestion We consider a number of questions, considerations and examples in connection with an anaerobic digestion project, which you should find helpful if thinking of investing. Embarking on any project requires consideration of a range of different issues. It is important that aspects such as financing, taxation, planning for the future and exit strategies are investigated before a commitment is made. This is especially true in the fast moving world of renewable energy. Every project and family situation is different and so advice must be sought to ensure the correct decisions are made, taking into account the specific characteristics of your project. You will need to consider issues such as: Does your business have ongoing high energy requirements? Would an anaerobic digestion project be compatible with your other activities? Do your homework to obtain information and advice from sector experts regarding practical issues, including: environmental impact surveys; grid connection availability and timescale; financial support sources; qualification and claims criteria; planning applications; access rights; legal issues; risk assessment; proposed project timescales; and anticipated and known changes due to impact the sector. Seek a proper feasibility analysis, working out post-tax returns and the timing of returns to you, compared to up-front costs. What size of project is best? Should you consider taking a small share in a bigger project if you have a good site? Should I own the equipment personally, through my existing business, in a new entity or through a pension? General advice cannot be given until the following questions have been answered: What does your existing business do? Will the energy produced be used (a) by the business, (b) personally, (c) exported to the grid or (d) a combination of a, b and c? 1

www.saffery.com If the biogas is to be exported, the costs of further processing will need to be factored in to any cost calculations. What other assets do you hold? Who do you want to benefit from the income generated? Are there family members with lower rates of marginal tax who might participate? What are your plans for succession? Do you require the protection of limited liability? Will you/should you own 100%? Example: Given the financial investment in an anaerobic digestion plant, there may be tax benefits to holding it in a separate entity. If entering into a business structure with others, limited liability protection would be advisable. How should I finance the project? Whether funds are being borrowed or existing capital is to be used, you must ensure comprehensive financial projections have been run to provide an accurate forecast of the return anticipated from the project. The model should allow for sensitivity analysis. Do you have sufficient free funds? What is your current exposure to debt? Head room within current bank facility. What manufacturer warranties are available? Are there other parties to the project? The cost of debt compared to the income generated from existing funds. Charges for restructuring existing debt facilities. What assets can be given as security? In a company structure, what is the ideal mix of share capital to subordinated shareholder debt? Should preference shares (as a proxy for subordinated debt) be used for inheritance tax (IHT) reliefs? 2

Thinking renewables: anaerobic digestion Should I consider entering a joint venture? Some joint venture deals are not as attractive as they first appear. It is essential to drill down into the finer details before signing any contract. Are you able to fund and run the project yourself? What is your attitude to risk? Consider the risk to reward ratio of all options. What are the terms of the joint venture being proposed? What is your past experience of the joint venture parties? What experience in the sector do the proposed joint venture parties have? What level of involvement is proposed for each party? Who will manage the project? What decision making input will you have? Will the landowner have a first call on profits? By entering a joint venture, what exclusivity rights will you give and over what area? What type of joint venture structure (mainly company or LLP) is best? Will the developer sell on the project and what implications may this have? Example: A developer may approach you to take a stake in what is essentially their project sited on your land. This can reduce the funds you need to raise and reduce your risk but the selection of holding structure is then critically important. Is tax relief available for the capital cost of installing the digestor? This will depend on whether the scheme is being operated as a trade, used in your business, providing power for private use or a combination of uses. Example: For trades and businesses the majority of the capital costs will normally qualify for capital allowances. There are important technical issues to be aware of when maximising claims for capital allowances. Advice should be sought on the arguments that can enable as 3

www.saffery.com much of the capital cost to qualify for allowances as possible. Private use restrictions may also apply. Careful consideration of the contracts will be required to ensure any capital allowance claims can be made as early as possible in the project. Can I claim the VAT back on the equipment and associated costs? Are you already VAT registered? Should you register, what other business activities do you operate? Will the project revenue push you over the VAT registration limits? Is the project output to be used for private use and/or business use? Will you be selling power to the National Grid or to other parties? Will the purchasers be using the power for business or residential use? Example: In most circumstances, an anaerobic digestion project undertaken by a VAT registered entity for use in connection with its trade or generating for export to the National Grid will get full VAT recovery. An adjustment or a charge will be necessary to deal with private or residential use. The anaerobic digestion project undertaken in a mixed estate business could impact the partial exemption VAT recovery. Do I need to pay tax on income and if so, at what rate? The rate of tax paid will depend on the type of entity that owns the scheme and the total level of annual profit/income of that entity. Example: Individuals (sole traders, partnerships and LLP) will pay income tax at their marginal rate. In the case of a company, income will form part of the company profits and be subject to corporation tax. 4

Thinking renewables: anaerobic digestion Do I pay National Insurance on profits generated? Is the scheme being operated as a trade? Is the power generated being used within your business? Example: If the scheme is run as a trade then both class 2 National Insurance contributions (NICs) (basic contributions paid by almost all self-employed people) and class 4 NICs (contributions paid by self-employed people, by reference to the profits earned) may apply. Do I need to consider Stamp Duty Land Tax/Land & Buildings Transaction Tax? If the land for the AD site is to be transferred or a ground lease put in place, then Stamp Duty Land Tax or Land & Buildings Transaction Tax may be relevant and advice should be sought. If I sell the project, will I need to pay capital gains tax? Is the scheme operated as a trade or used in a business? Is any of the power generated used privately? What was the total cost of construction and what is the sales price? What other capital gains do you have in the same year? Is there scope to roll-over gains? Example: If the scheme is sold as part of the trade or was operated as a trade, then with some forward planning there should be opportunities for rollover relief or other capital taxes reliefs, eg Entrepreneurs Relief. 5

www.saffery.com Will owning the anaerobic digestion project impact on my inheritance tax position? Obtaining advice at an early stage is key to ensuring access to the ability to best protect your IHT position. It is recommended that you talk to your tax adviser before making any commitment to the project. The value of the other assets you own. The nature of and the use of other assets held, ie business or non-business. Your relationship to the person to whom your assets will pass under your will. The type of the entity or entities in which assets are held and the nature of assets within each entity. Your age and state of health. Example: The market value of your project (valued by reference to the future income stream) is likely to impact on your IHT position. The project should qualify for Business Property Relief with certain important caveats. However, an option into lease deal with a developer could be seriously detrimental to your overall IHT position. A self-developed project or joint venture properly structured should attract IHT relief and could also release a revenue income stream allowing the proprietor additional flexibility when looking at succession planning for the core business. Do I need to produce accounts? Will the project be operated as a trade or used within a business? Example: If the anaerobic digestion scheme is to be included in an existing business the accounting details will be included within that business. If the scheme will be operated as a separate trade then separate accounts, tax computations etc will be required. 6

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