Capital allowances on commercial solar

Solar is special-rate expenditure — this is the crucial fact

HMRC's capital allowances manual is explicit: the installation of solar panels is special-rate expenditure — named in its own right at section 104A(1)(g) of the Capital Allowances Act 2001, and pooled alongside integral features and long-life assets. That single classification drives everything else, and it's the fact most commercial solar sales material gets wrong.

The headline 100% relief many businesses have heard of — full expensing — applies only to main-rate plant and machinery. Because solar is special-rate, full expensing does not apply to it. Anyone telling you a solar system gets 100% full expensing is mistaken. What solar does get is still very generous; it just comes through two different routes.

Route one: the Annual Investment Allowance (100%)

The Annual Investment Allowance (AIA) lets a business deduct 100% of qualifying capital spend from its taxable profits in the year of purchase, up to a limit that is now permanently set at £1m per year. Solar PV qualifies. So for the great majority of commercial installs — which fall well under £1m — the AIA delivers effectively 100% relief in year one.

For a profitable limited company paying the 25% main rate of corporation tax, a £160,000 system claimed under AIA reduces the tax bill by up to £40,000 (illustrative). The relief is a function of your tax rate, so a company in the marginal band or paying the 19% small-profits rate gets proportionally less — your accountant will confirm the exact figure.

Worked example: net cost after AIA

Because the whole cost is deducted from taxable profit in year one (up to the £1m cap), the effective net cost of an owned system is the headline price minus the tax relief. Illustrative figures for a profitable company:

Above £1m of spend in a year, the excess drops to the 50% first-year allowance (below). These figures assume the company has enough taxable profit to absorb the deduction; where it doesn't, the allowance can create or increase a loss to carry forward. Model it against paying cash on the finance calculator.

Route two: the 50% first-year allowance (above the AIA cap)

Two limits worth knowing before you rely on it: the 50% first-year allowance is available to companies within the charge to corporation tax, not to sole traders or partnerships, and it is not available on plant bought in order to lease it out. The Annual Investment Allowance carries neither restriction, which is why it does the work on the great majority of projects.

If your solar spend in a year exceeds the £1m AIA limit — a large ground-mount scheme, say, or several sites at once — the excess special-rate expenditure qualifies for the 50% first-year allowance. You deduct 50% of that cost in year one, then claim 6% writing-down allowances on the remaining balance in later years.

Both the 50% first-year allowance and full expensing were introduced at Spring Budget 2023 with a sunset date of 1 April 2026. The Autumn Finance Bill 2023 removed that sunset, making both permanent — so you can plan around them with confidence.

The part everyone forgets: the finance structure decides who claims

You can only claim capital allowances on an asset you are treated as owning. That makes the funding route decisive:

• Hire purchase: HMRC treats you as the owner from the start, so you claim the full allowances as if you'd paid cash. The instalments of capital are ignored for allowances.
• Equipment loan / cash purchase: you own the system outright, so you get the full allowances.
• Finance lease: the lessor is the legal owner and normally claims the allowances, reflecting the benefit in lower rentals — unless it's a long-funding lease, where the lessee can elect to claim.
• Operating lease: no allowances for you, but the rentals are a fully deductible revenue expense.
• PPA: the third-party owner claims the allowances and keeps the export income. You just buy the power.

This is the single biggest reason a profitable business is usually better off owning its system through asset finance than signing a PPA: the relief is worth real money, and only the owner can claim it. We lay out the full comparison in asset finance vs PPA.

Hire purchase: you claim the relief, not the funder

Hire purchase is the route most commercial solar buyers ask about, and the capital allowances treatment is the reason. For tax purposes HMRC treats hire purchase as a purchase, not a rental: you are the person who has incurred the capital expenditure, so you claim the allowances yourself — even though legal title only passes when you pay the option fee at the end of the term.

The practical consequence is that the relief is not spread across the instalments. Once the expenditure is incurred — broadly, once you are unconditionally obliged to pay it — the full capital cost is available for relief in that accounting period — 100% under the AIA up to the £1m cap, or the 50% first-year allowance on special-rate spend above it, with 6% writing-down allowances on the balance thereafter. A company that installs a £160,000 system on hire purchase and repays it over five years still claims against the whole £160,000 for the period in which that expenditure is incurred (illustrative). The obligation to pay is the trigger, not the final instalment.

The interest, or finance charge, sits outside the capital allowances claim. It isn't capital expenditure, so it attracts no allowances. It is instead deducted as an ordinary business expense over the life of the agreement, alongside costs like insurance and maintenance. Two separate deductions through two separate mechanisms — worth flagging to your accountant so the finance charge isn't capitalised into the asset cost by mistake.

Compare that with a finance lease on a commercial solar system, where the lessor remains the owner and normally claims the allowances itself, pricing that benefit into lower rentals; the exception is a long-funding lease, where the lessee can elect to claim. Under a lease you deduct the rentals rather than the asset cost. For a profitable company with enough taxable profit to absorb it, claiming the allowances yourself through solar hire purchase is usually worth more than a rental deduction spread across the term — but that depends on your profit position and the rate you pay, which is why we model both routes side by side before you commit.

How to actually claim it

Knowing the allowance exists is not the same as getting the money. The mechanics are simple, but they are almost never written down:

• It goes in the company tax return, not a separate form. Capital allowances are claimed in the capital-allowances computation that supports your CT600. There is no application, no approval and no grant body — you claim it, and it reduces the taxable profit for that accounting period.
• The trigger is when the expenditure is incurred, not when the system is switched on. Under section 5 of the Capital Allowances Act 2001 that is the date you come under an unconditional obligation to pay, even if payment falls due later. On a commissioned rooftop array the two dates often coincide, because payment usually becomes unconditional on practical completion — but deposits, staged payments and retentions can land the expenditure in an earlier period, so check the payment milestones in your EPC contract.
• The AIA limit is per accounting period, and shared. The £1m Annual Investment Allowance covers all qualifying plant in the period, not just the solar. If you have already spent the allowance on other kit, the solar falls to the 50% first-year allowance instead.
• You can go back. A company tax return can normally be amended for up to twelve months after the statutory filing date, so a system commissioned in a recently-closed period can usually still be brought into a claim. Beyond that window an unclaimed allowance is not lost outright — the expenditure can still enter the pool and attract writing-down allowances going forward.
• What your accountant will want: the installer’s invoice split between qualifying plant and any non-qualifying works, the commissioning date, the finance agreement (it decides who is treated as owner), and the DNO connection paperwork.

If you are financing the system, hand your accountant the agreement before the year end. The route decides who may claim at all, and that is not something you can restructure afterwards — hire purchase and an equipment loan keep the claim with you; a finance lease normally does not. If a grant paid for part of the system, the allowances apply only to the part you funded — see does a grant reduce the capital allowances on solar panels? and our guide to grants for business solar.

What happens to the allowances if you sell, or refinance

This is the part that catches people out, and it is the reason we will not arrange a solar sale and leaseback without your accountant in the room.

When you dispose of an asset you have claimed allowances on — selling it, or selling it to a funder and leasing it back — a disposal value is brought into account. Broadly, that is the sale proceeds, capped at the original cost by section 62. If the pool has already been written down (which it will have been, if you took the full AIA in year one), that disposal value can produce a balancing charge: an amount added back to taxable profit, effectively clawing back relief you have already had. If instead you claimed the 50% first-year allowance, section 59B does something sharper — it triggers an immediate balancing charge on roughly half the disposal value rather than simply reducing the pool.

Three practical consequences:

• A sale-and-leaseback on a system that took 100% AIA can trigger a balancing charge in the year of sale. That does not make it a bad deal — it makes it a deal you model after tax, not before.
• Selling the building with the solar on it is also a disposal of the plant. The apportionment between building and fixtures is negotiable, and it is worth negotiating.
• A straight refinance — borrowing against the asset without disposing of it — does not bring in a disposal value at all, which is frequently the cheaper answer once the charge is priced in. Be precise about the word, though: a sale-and-leaseback is a disposal, because you cease to own the asset, and specific anti-avoidance rules then apply.

We model the balancing charge alongside the cash released before recommending either route. The finance calculator handles the repayment side; the tax side needs your actual pool position, which is why your accountant sees the numbers first.

VAT and the SEG, briefly

A commercial solar installation is standard-rated at 20%, and that VAT is reclaimable by VAT-registered businesses regardless of route; on hire purchase and loans it's paid up front, while leases spread it across the rentals. The 0% rate on energy-saving materials applies to residential accommodation only, so a commercial install is never zero-rated — our guide to VAT on commercial solar covers the detail. Separately, the Smart Export Guarantee pays the system owner for exported electricity — another benefit that stays with you under asset finance but goes to the funder under a PPA.

A note on accuracy

Capital allowances interact with your wider tax position — other AIA claims, profit levels, group structure and timing all matter — so the figures above are the framework, not advice for your specific company. We model the allowances into every finance proposal and hand your accountant a clean summary to confirm. This guide reflects the rules as at June 2026; the authority for the special-rate treatment is HMRC's capital allowances manual at CA22335.