How a financed solar array is accounted for: owned, hire purchase, lease or PPA

Two things change when a business pays for solar a different way: who claims the tax relief, and what appears on the balance sheet. The first is covered in capital allowances on solar panels. This page covers the second, for the finance director or the accountant who has to put the array into the accounts. It is general information, not accounting advice: the treatment depends on the contract and on the reporting framework the company uses, so agree it with the auditor before signing.

Owned: loan, cash or hire purchase

When the business owns the array, whether it paid cash, borrowed or entered a hire purchase agreement, it recognises the array as property, plant and equipment at cost. Cost includes the panels, inverters, mounting and electrical works needed to bring the system into use. Any loan or hire purchase balance is shown as a liability. The array is then depreciated over its useful life. Useful life is an accounting estimate, and inverters are usually replaced sooner than panels, so many companies depreciate the major components over different lives.

Depreciation and deferred tax

Accounting depreciation and the capital allowance are different numbers. The Annual Investment Allowance can give 100% tax relief in the first year (gov.uk), while the accounts spread the cost over many years. The gap is a timing difference and produces a deferred tax liability. This is a modelled example with illustrative figures: a £200,000 array depreciated straight-line over 25 years charges £8,000 a year, leaving a book value of £192,000 after year one against a tax value of nil. At the 25% main rate that is a deferred tax liability of £48,000 at the end of year one, which unwinds over the following years as depreciation continues and no more allowances are available.

Leases: IFRS 16 and FRS 102

Under IFRS 16 a lessee recognises a right-of-use asset and a lease liability for most leases, with exemptions for short-term and low-value leases (IFRS Foundation). The old split between an operating lease kept off the balance sheet and a finance lease on it no longer applies to the lessee. UK companies reporting under FRS 102 are moving the same way: the 2024 periodic review amendments, issued by the Financial Reporting Council in March 2024, take effect for accounting periods starting on or after 1 January 2026 and remove the operating and finance distinction for lessees (FRC). Lessors keep the distinction. Micro-entities reporting under FRS 105 are not affected by the lease changes.

For a solar lease this matters in two ways. A lease no longer looks lighter than a loan on the balance sheet, so the old argument for a lease as off-balance-sheet finance is gone for most reporters. And the lessor, not the lessee, keeps the capital allowances, which is why a lease rental can be priced lower than the equivalent loan payment. Operating lease vs finance lease for solar sets out the contract differences.

PPAs

A power purchase agreement is usually accounted for as a purchase of electricity, with the per-kWh charge expensed as it is incurred. The exception is where the contract gives the buyer the right to substantially all the output of a specific array and the right to direct its use. IFRS 16 can then treat the contract as containing a lease, and the buyer would recognise an asset and a liability. The answer turns on the contract wording, so a PPA should go to the auditor before signature, not after.

What to ask before signing

Four questions settle most of it. Which reporting framework does the company use: IFRS, FRS 102 or FRS 105? Who owns the array at the end of the term? Does the contract give the business control of a specific array, or only a share of the electricity it produces? And does any loan covenant measure debt or net debt in a way a new lease liability would change? Credit teams look at the same things from the lender's side, which what lenders check before they lend covers. To compare the routes against your own numbers, use the finance route checker.