Does a grant reduce the capital allowances on solar panels?

Quick answer: Yes. If a public body pays part of the cost of a solar system, you cannot claim capital allowances on that part — only on the portion you funded yourself. A grant is still valuable, but for a profitable business it is worth less than its face value, so it should be compared after tax.

Most guidance on business solar treats grants and tax relief as two separate piles of money you simply add together. They are not separate. The two interact, and the interaction is worth understanding before you let a grant application shape the timing or structure of a project.

The rule in one sentence

Under the Capital Allowances Act 2001, where expenditure on plant has been met — directly or indirectly — by a contribution from a public body, that expenditure is treated as not having been incurred by you, so it cannot attract capital allowances. The rule sits in the Act’s contributions provisions, at section 532. The same section can also catch contributions from other parties, such as a landlord, so tell your accountant about any third-party contribution.

Solar PV is plant, and it is special-rate expenditure, so on the part you fund yourself it normally qualifies for the Annual Investment Allowance at 100% on up to £1m of spend a year, with companies able to claim the 50% first-year allowance above that. What the rule changes is the base those allowances apply to.

A worked example

The figures below are illustrative, and the grant percentage is hypothetical rather than the rate of any real scheme. A company paying the 25% main rate of corporation tax installs a £100,000 system.

	Without a grant	With a 30% grant
Grant received	£0	£30,000
Cost the company funds	£100,000	£70,000
Expenditure qualifying for allowances	£100,000	£70,000
Tax saved at 25%	£25,000	£17,500
Net cost after grant and tax	£75,000	£52,500

The grant improves the net position by £22,500 rather than £30,000, because £7,500 of tax relief disappears with it. Put another way, for a company at the 25% rate a grant is worth about 75p in the pound after tax.

That is still a clear improvement. The point is not that grants are bad — it is that the true value of a grant is the after-tax figure, and that is the number to set against the cost of waiting for a funding round, the conditions attached, and the energy savings you lose while the project is on hold.

When the numbers point the other way

For most profitable businesses, a genuinely open grant is worth taking. But a few situations deserve a second look:

• The grant forces a delay. If a scheme requires you to apply and wait for approval before ordering equipment, every month of delay is a month of electricity savings you do not get. On a system saving several thousand pounds a month, a slow application can cost more than the after-tax value of a small grant.
• The conditions restrict what you can do later. Some grants require you to keep the equipment for a set period, or claw funding back if you sell or refinance it. That can close off a later sale-and-leaseback or change of ownership.
• The business is not paying much tax. Allowances are only as valuable as the tax they save. A business with losses or low profits loses less relief when a grant reduces its qualifying expenditure, which makes the grant relatively more valuable.

How finance fits around a grant

A grant rarely covers the whole project, so the balance is usually funded with cash or finance — and the finance route decides who claims allowances on that balance.

• Hire purchase and equipment loans. You are treated as the owner, so you claim allowances on the part you fund, and the finance simply spreads the payment.
• Leases. The funder normally claims the allowances — for panels fixed to your building this needs a joint election with you — unless the lease is a long funding lease, broadly a finance-type lease of more than seven years or any sale and finance leaseback, in which case you claim them. Check whether the grant scheme requires you to own the equipment, because some do.
• Power purchase agreements. A third party owns the system, so neither the grant rules nor the allowances work in the same way for you — you buy electricity rather than an asset.

If you are exploring what is available before choosing a route, our guide to solar grants for business explains how to find a scheme that is genuinely open and how to check its conditions. For the allowances themselves, see our capital allowances guide, and for how each finance route treats ownership, compare hire purchase and the finance lease.

What to have ready

When a grant is involved, your accountant will want:

• the installer’s invoice, split between qualifying equipment and any other works;
• the grant offer letter, showing what the grant was paid towards and any conditions;
• the date and amount of the grant actually received; and
• the finance agreement for the balance, if you are not paying cash.

With those in hand, the allowances claim reflects only the expenditure you actually bore, and there are no surprises when the tax return is prepared.

The bottom line

A grant and capital allowances are not additive. The part of your solar project a public grant pays for does not qualify for allowances, so a grant is worth its after-tax value, not its headline figure. Take a genuinely open grant when the timing and conditions work, fund the balance in the way that keeps the allowances where they are most valuable, and compare the whole package in pounds before you commit.