Treasury to impose VAT increase on UK wind and solar industry

Treasury chiefs have unveiled proposals to increase the rate of VAT on solar and wind installations to fall in line with European law.

Currently homeowners only pay 5% VAT when installing a solar PV or solar thermal hot water heating system as opposed to the standard rate of 20% VAT on other goods and services.

However, the Government has this week put forward a proposal to increase this to 20%.

This would add £900 to the cost of a typical 4kW solar installation on someone’s home, which is currently around £6,400.

According to DECC analysis, the tax shift is likely to raise an extra £310m for the Exchequer over the next six years.

Under EU legislation, the UK is permitted to have up to two different reduced rates of VAT. Currently, the UK has just one reduced rate at 5%, this being the lowest rate permissible.

However, the European Court of Justice ruled the UK Government applied the relief too widely by failing to restrict the benefit to certain social groups or those with certain social needs.

In line with the CJEU’s judgment, the Government has now announced it intends to amend the relevant legislation in the Finance Bill 2016. The Government claims its decision is designed “to retain as much of the relief as possible whilst ensuring that UK law is fully compliant with EU law”.

The reduced rate will continue to apply as it does now to supplies made to people living in dwellings who have a social need, to supplies made to ‘relevant housing associations’ and to installations in all buildings used solely for a relevant residential purpose.

A ‘qualifying person’ is defined as someone who:

a) is aged 60 or over, or

b) is in receipt of one or more of the following benefits: council tax benefit, disability living allowance, any element of child tax credit except the family element, working tax credit, housing benefit or income support, income based job-seekers allowance, disablement pension, war disablement pension, personal independence payment, armed forces independence payment and universal credit.

Following the change in legislation, where the cost of the materials element is greater than the labour element of a supply of installing ESMs, an installer will need to account for VAT at the standard rate (20%) on the material element (the labour element remains entitled to the reduced rate).

However, if the supplier can demonstrate that its customer is a ‘qualifying person’, a relevant housing association or a building used solely for a relevant residential purpose the whole supply will be entitled to the reduced rate (including the materials element).

The HMRC consultation stems from an EU court ruling that the UK’s current reduced rate of VAT for solar and other energy saving products violates the EU’s VAT directive as they cannot be considered a ‘renovation to a property’. However it is only solar, along with wind and hydropower, that HMRC is proposing to completely remove from the 5% VAT level.

Mike Landy, Head of Policy at the Solar Trade Association commented: “This requires urgent action from both the UK Government in London and the European Commission in Brussels.”

“Instead of just accepting the EU ruling HMRC needs to push back and argue for solar to keep its reduced VAT rate. The Department of Energy and Climate Change and the Treasury also need to take this massive hike in end prices into consideration in their imminent decision on how far to cut the Feed-in Tariff for solar.”

“And we need the European Commission to move quickly to amend EU law so that all renewables and energy efficiency products are guaranteed a reduced rate of VAT. Brussels needs to remember that the EU doesn’t have many practical tools within its power to promote renewables, but rules on VAT is one of them.”

The proposal is for this change to come into force on 1 August 2016.

The final decision on Feed-in Tariffs for solar is expected later this year – and possibly next week – although it could also be postponed to January 2016.

Greenpeace UK’s Chief Scientist Dr Doug Parr said: “A vital part of the sustainable energy future being championed in Paris today is being undermined in London by changes to VAT that must be resisted. In addition to the confusion created by dramatic cuts to solar support, this creates a new round of uncertainty for business, and more expense for homeowners who are seeking to do their bit for the climate, as loudly requested by David Cameron last week.

“This move makes a mockery of Cameron’s claims to climate leadership, and shows once again that is Osborne who is ultimately holding the reins on energy policy in the UK.”

The Department for Energy and Climate Change is currently proposing to cut the tariff for domestic solar by 87% from 12p/kWh to 1.63p/kWh. The Solar Trade Association has been calling for 8p/kWh in its £1 Emergency solar rescue plan.

However initial analysis by the Solar Trade Association suggests that taking this proposed hike in VAT into account, Feed-in Tariffs would need to be raised back up to 12p/kWh to get the same payback on investment for homeowners.

This news on VAT follows the announcement over the weekend that EU price controls and import tariffs on solar panels imported from China are to continue into the near future, accounting for about £380 of the cost of a typical domestic install. The Solar Trade Association is calling on the European Commission to drop the price controls, which it says are artificially and unnecessarily inflating the price of solar PV in the UK.

Mark Bramah, Director of Association for Public Service Excellence (APSE) Energy said: “The fact that three renewable technologies were singled out for the removal of the social exemption is particularly perplexing – if there is ever a set of technologies delivering a social benefit then it is renewables.

“Our members have already put on hold a number of projects which would help reduce fuel poverty due to previous renewable energy cuts. This will further damage the ability for many local authorities to act on their ambition to improve their housing stock and reduce fuel poverty in an effective, low-carbon way.”

The proposed VAT change must also be viewed in the wider policy context. Since June there have been thirteen proposed and enacted policy changes which have been hugely damaging to the renewable energy and low carbon industries.

The REA continues to wait for an announcement on a replacement for the Green Deal as the Government has yet to unveil any new policy that would effectively increase the efficiency of the UK’s housing stock.

Lauren Cook, Policy Analyst at the REA said: “Once again this is bad news for the renewable energy and energy efficiency market, if the proposal is successful. An increase in costs of 15% for all wind, hydro, and solar projects is yet another blow to an industry facing significant job losses and shifting sands when it comes to policy.

“We need more renewable power to meet our legally binding renewables targets and carbon budgets, which even Ministers admit are now looking challenging. Although this is an EU ruling, the Government has some leeway in implementing the change but has chosen to do so in the least favourable way.”