European ruling could mean tax windfall for PV owners, says Michelmores LLP

A recent ruling by the European Court of Justice (ECJ) may result in UK homeowners who have installed solar panels reclaiming millions of pounds of VAT, says Brian Garner, director of tax at Michelmores LLP.

Following the case of Linz District Independent Finance which was heard by a Tribunal in Austria, the European Court of Justice reportedly ruled that sales of electricity generated from solar panels on Linz’s roof to the national power company constituted a business activity and therefore Linz was able to register and reclaim input VAT.  

Brian Garner, director of tax at Michelmores LLP said: “The implication for UK homeowners who have installed solar PV panels is that they are entitled to register for VAT and claim back VAT paid on related costs.  

“This may extend to more than just the cost of installation – for example, are roof repairs now partly recoverable?  What does it means for VAT registered businesses operating from split home and work units, such as farmhouses – should recovery percentages now be revised upwards?  These are all questions that will need to be resolved in due course.  For farmers, no doubt the NFU will revisit their guidelines on this topic and if they see fit issue amendments.”

According to Garner, some commentators have forecast that the Treasury could lose up to £500m as a result of the decision, and as a consequence another serious rethink of renewable energy taxation strategy is required.  

Brain Garner continued: “One possibility might be to remove the current exemption from direct tax which householders currently enjoy under the domestic micro-generation exemption.   This would be the logical step as if it is argued that the generation is a business with recoverable VAT, the profits should be taxable.  This would reduce and possibly negate any VAT saving.

“Concerns have also been raised about how HMRC will cope if thousands of homeowners simultaneously submit VAT registration applications.  The power companies are also concerned as it could result in them receiving thousands of additional invoices from small suppliers to the National Grid which would be an administrative nightmare for them.

“Not surprisingly HMRC have been considering the implications of this decision since its release in June.  It is too early to say definitely make a claim to recover the VAT but it is certainly a case of ‘watch this space’.”