Category: Tax

Tax Treatment of Solar PPA Payments

Are PPA payments operating expense, lease accounting under IFRS 16, or capital? HMRC guidance and accounting practice for 2026.

The accounting question every CFO asks

Is a PPA payment operating expense? On-balance-sheet lease under IFRS 16? Capital under HMRC? The answer determines tax deductibility, balance sheet impact and director-fitness reporting.

HMRC view (UK corporate)

Payments under a service-style PPA — i.e., where you pay per kWh delivered — are typically treated as operating expense, fully deductible against corporation tax. No capital element.

IFRS 16 considerations

IFRS 16 requires lease accounting if the contract is in substance a lease. For PPAs, the test is:

• Is there an identified asset that the off-taker controls?
• Does the off-taker direct how the asset is used?
• Does the off-taker get substantially all the economic benefits?

Most standard PPAs FAIL these tests (the SPV / provider directs the asset, not the off-taker), so they're treated as service contracts — staying off-balance-sheet. But badly-structured contracts can trigger IFRS 16 lease accounting; check with your auditor.

SEG income

SEG export payments are treated as other income for UK corporation tax — fully taxable. Some accountants treat as scope reduction in main P&L; either acceptable.

VAT

PPA payments are subject to VAT at standard rate (20%) — recoverable for VAT-registered businesses. Generator typically issues monthly VAT invoices.

What to confirm with your auditor before signing

• IFRS 16 treatment for the specific contract structure
• HMRC tax deductibility confirmation
• VAT recovery on PPA payments
• Any change-in-tax-law pass-through implications
• Treatment for sale of business (PPA assignment)