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Published: 07 November 2016
Sector: Energy

How business rate increases are threatening renewable energy installations

On 10 October 2016 an Early Day Motion was tabled by Green MP Caroline Lucas expressing “deep concern” at proposals by the Valuation Office Agency that could result in an eightfold increase in business rates that could be payable from April 2017 on commercial rooftop solar installations. The Motion called on the Government to take action to prevent “unexpected and extreme” rate increases.

Who pays business rates? 

Subject to certain exemptions, business rates are payable by all non-domestic organisations. This not only includes private-sector businesses but also public sector organisations such as hospitals and schools. In the case of renewable energy installations, business rates are payable with limited exemptions (e.g. for small-scale installations on agricultural land with a specified proportion used for self-consumption).

How are business rates calculated?

Business rates are calculated by multiplying the rateable value of a property by the uniform business rate (a rate set by the government). Rateable values are set periodically, normally every five years. The current rateable value list was set in 2010. A revision of the list should therefore have taken place in 2015 but was delayed until 2017.   

One of the methods on which rateable values are calculated is on the basis of the business’s costs and revenues as of the valuation date. In the case of the 2010 list, the valuation date was 2008. In the case of the 2017 revaluation, the valuation date being used was 1 April 2015.   

What are the effects of proposed revaluation on renewable energy projects?

As part of the calculation of revenues, rateable values will take into account renewable energy financial benefits. At the time of the 2010 valuation, the only incentive available was Renewable Obligation Certificate (ROCs). However, in 2015 (the year on which the 2017 revaluation will be based), there were a number of other benefits available: Feed-in Tariffs (FiTs), Contracts for Differences and Renewable Heat Incentive.   

Old Vs New projects

The effect of this change is that newer projects (that are built after 2012) and projects with ROCs are unlikely to see a significant change to their rateable value. However, older (pre-2012) FiT-accredited projects are likely to see substantial increases in their rateable value with predicted increases, in the case of solar farms, of 3.5 times their current rateable value (i.e. up from £8,000 per MW to £28,000 per MW).   

Businesses which installed rooftop-solar installations for self-consumption will find that the solar panels are treated as plant and machinery of the business. The rateable value will be based on assumed capital costs as of 1 April 2015 and it is estimated that the current rateable value of £8,000 per MW for solar installations will increase to somewhere in the region of £48,000 to £62,000 per MW.   

Transitional arrangements   

The Department for Communities and Local Government issued a consultation on transitional arrangements for business rates in September 2016. The Department’s proposal is to facilitate increases (and decreases) in rates gradually over a number of years. This would be achieved by capping annual increases (and decreases). There are two options: one is to introduce caps over a five year period, so the full increase (or decrease) starts being paid after five years; whilst the second option facilitates rate reductions more quickly but, as a quid pro quo, large ratepayers facing an increase will find the increase introduced more quickly, with a potential increase of 45% in the first year.

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