With the EU stipulating a rise in VAT for solar panels and battery storage units as of the 1st of October 2019, delaying the decision to install your system could cost you dearly!
Last week, HMRC announced an amendment to legislation governing energy-saving materials such as solar panels and wind turbines. As a result, rates will rise from 5% to the standard 20%. On the face of it, this appears to be a cynical move from a Government supposedly leading the charge on emissions reductions – especially given some of their other recent and questionable moves regarding energy generation, but the reasons behind the rise are more complex than that.
Since September 1997, a reduced VAT rate of 5% (the lowest rate allowable under EU law) has been applied to the supply of domestic fuel and power. The scope of the reduced rate has been extended to include some other supplies, including, from July 1st, 1998 the installation of energy saving materials such as solar panels. For many years, homeowners looking to reduce their electricity bills (and do their part in the war on climate change) have enjoyed the benefit of a 5% VAT rate on both materials and labour costs. This lower rate was applicable only to domestic installations and only if the material AND the installation were provided by authorised installers. Materials bought for DIY installation were subject to 20% VAT.
In June 2015, the European Court of Justice upheld a ruling that the UK’s scope of the application of the 5% VAT was too wide, representing an infraction of EU-wide laws. It appeared the UK Government was set to comply with the ruling and apply the higher VAT rate through the Finance Bill, March 2016. However, the then Treasury Minister, David Gauke confirmed, “the decision was taken …. not to proceed with any changes to VAT on energy saving materials in this Finance Bill because new evidence had emerged and we no longer believed that we needed to go ahead with what was previously suggested.”
It seems the Government has deliberated over the new evidence for as long as the EU is going to allow. With the threat of impending financial penalties for infraction of EU-wide tax laws, HMRC has been forced to amend the legislation that allows for the provision of the reduced VAT rate. We can’t help but consider this is also a point in the Brexit negotiations.
Until now, qualifying ‘energy saving materials’ included solar panels for domestic electricity and heating, water turbines, wind turbines and solar thermal (water heating) panels, air source heat pumps, and ground source heat pumps. The key beneficiaries of this reduced rate of VAT were homeowners and other properties functioning for residential purposes, such as care homes, children’s homes, etc.
The installation of energy saving materials now has to fall under the category of the ‘provision, construction, renovation or alteration’ of housing or supplies that amount to the ‘renovation or repairing of private dwellings’. Items that are installed solely for the purpose of simply generating electricity will not be classified as ‘renovation’. Consequently, solar panels, water turbines and wind turbines, along with battery storage systems will no longer qualify for the reduced rate of VAT. If, however, the labour costs of installing energy saving material are greater than the cost of the material itself, the labour costs will qualify for a 5% VAT rate.
In addition, subsequent to the new ruling, only a ‘qualifying person’ looking to install energy-saving measures will qualify for reduced rates. A ‘qualifying person’ includes those over the age of 60, those in receipt of benefits such as council tax benefit, disability living allowance, income support, disablement pensions, etc. Relevant housing associations; private providers of social housing, registered social landlords, societies, etc., will also qualify for the reduced rate.
To be clear, for non-qualifying persons, the new legislation applies the 20% VAT rate to materials; 5% VAT will remain in place for the labour costs of installation, as long as the cost of the materials outweighs the cost of the labour. This will be the case in the majority of domestic installations, but, as solar panels and battery storage units are also the most popular type of installation and are excluded as they do not qualify as ‘renovation’, the full rate of 20% applies to both materials and labour.
This new legislation was passed on the 25th of June 2019 and comes into effect on the 1st of October. It clearly does no favours to a large percentage of homeowners who might have sought to install energy saving measures to their properties in the future. Given the legislation was passed on the same day the House of Commons passed legislation to commit the UK to net-zero carbon emissions by 2050, the analogy of ‘fighting a battle with one hand tied behind your back’ springs to mind. However, HMRC has stated until our withdrawal from the EU is finalised, our obligations and our rights to determine tax rates and reliefs must remain compliant with EU law.
Ironically, home coal supplies continue to benefit from the lower VAT rate.
Given public support for renewable energy is now at 84%, an all-time high, we can only hope that with the UK due to leave the EU on the 31st October 2019, this latest amendment in legislation will be quickly revised and the lower VAT rate applied as soon as Brexit is completed. Indeed, Sir John Redwood, MP for Wokingham, has publicly stated that, in light of our imminent departure from the EU, the UK Government should reject their demand for compliance with their tax legislation. Many would agree, but the UK at this time remains part of the EU and therefore is subject to its laws. Additionally, under the draft proposal of the Withdrawal Agreement, the UK has agreed to remain compliant with EU law throughout the transitional period – twenty-one months – with an option for a single time extension. So, our imminent Brexit is not particularly imminent. As with so much of the Brexit issue, whether that clause persists remains to be seen, but flouting the law before the UK has settled the Brexit situation will only damage our negotiating position.
Leaving Brexit to one side, the EU law undoubtedly damages the UK’s ability to meet its Climate Change commitments. The Committee on Climate Change estimates the UK needs to reduce domestic emissions by at least 3% each year if we have any chance of meeting the original commitment of an 80% reduction in emissions (compared to 1990 levels) by 2050.
Clearly, without supporting homeowners and enlisting their help in achieving this target, the UK is going to fall woefully short of the more ambitious net-zero target. For the homeowner considering installing solar power systems, the time to act is now, before the VAT hike happens on the 1st October 2019.
If you’d like to find out more about solar panels and battery storage solutions, and how you can save money on your electricity bills – and possibly even earn money from excess power generated by your system, get in touch with our team today on 01226 715522 or email us at firstname.lastname@example.org.
ASK Renewables is part of the MCS and a Which? Trusted Trader. We are also approved by the National Association of Professional Inspectors and Testers (NAPIT), have signed up to the Renewable Energy Consumer Code and are registered with the Trading Standards Institute Consumer Codes Approval Scheme (TSI).