STA BLOGS: Been There, Done VAT

11 June 2019:

In this STA Blog, Gemma Stanley of the Solar Trade Association lambasts HMRC’s proposals to change how reduced-rate VAT is applied to solar and other energy saving materials.

Gumperson’s Proof states that ‘the most undesirable things are the most certain (death and taxes)’. Whilst the former remains as certain as ever, the same cannot be said for the UK’s approach to taxing technologies essential to reducing our nation’s bills, decarbonising our homes and enabling flexibility within our electricity system.  To the immense frustration of the clean energy industry, we are yet again fighting off another proposed VAT hike for solar and storage technologies.

Despite fending off similar proposals back in 2016, the reduced rate VAT of 5% available to domestic solar PV and solar thermal installations (as well as an array of other technologies) is again under threat. The STA established two years ago that any domestic installation of solar and storage installed together is able to qualify for the reduced rate VAT of 5% because solar features on an ‘energy saving materials’ list. Therefore, storage, when installed at the same time, is recognised as ancillary to solar, despite not featuring on the list.

Treasury initially proposed changing VAT rules for solar in 2015 because the European Commission had ruled in 2013 that we were applying the reduced rate VAT to energy saving materials too extensively and its decision was upheld by the European Court of Justice. Hence, Treasury proposed raising the 5% VAT for solar to 20%. This caused a huge uproar from industry and (rightly) sympathetic MPs from across the Commons. Strong opposition to the proposals meant a back-tracking from Government and the status quo was restored. However, ominously, the STA had since struggled to get the 5% VAT commitment in writing.

Moving forward, we hoped this was where things would stay. There had been clear deliberation at Commissioner Level over the original ECJ ruling and European tax and energy policy was evolving in recognition of the climate change threat. More and more solar installations have been going in with storage, which ensures best use is made of the generated electricity through self-consumption and which supports the Government’s smart energy agenda. However, our argument that storage should be included on the energy savings list so that all installations of storage (namely retrofits onto existing solar systems and stand-alone storage) could benefit from reduced rate VAT, fell on deaf ears precisely because the Treasury was not able to, or did not want to, change the scope of VAT further.

We were shocked when it emerged a few weeks ago that HMRC had published draft legislation to be implemented this October that would change VAT again. Based on the initial consultation they had held in 2015, HMRC proposed that reduced rate VAT should only be available to installations where the material cost of the installation does not exceed 60% of total installation cost. This again is due to the EC ruling stipulating that reduced rate VAT should only be applied when the material element of the installation cost is not ‘significant’. According to the Treasury, the effect this would have on our industry would be ‘negligible’. We have not been able to attain the analysis that HMRC conducted on the various technologies that this would effect, but ‘negligible’ certainly isn’t the conclusion we would come to. For modest, smaller installations of solar the cost of the materials is likely to fall comfortably under 60%. However, for larger, premium solar installations with fancier kit, and for installations of solar and storage together, the 60% threshold is easily exceeded.

If implemented, this VAT hike will be damaging. It will obviously act as a disincentive to install storage with solar, as it would drive up the total costs of installations on what is already a significant investment. It would also distort the market away from more expensive products to ones that were both cheaper and smaller, driving the market away from quality and innovation. The repercussions for the supply chain and the industry as a whole are also likely to be substantial as this proposal came just a week after the FiT was removed from households installing solar. One only needs to look at the most recent deployment figures for solar to know that further changes to the market will have significant ramifications. For the smart energy agenda and the tremendous opportunities to develop leading British battery storage companies, it makes no sense at all.

Is the change necessary? Well, there are other countries in the EU who apply reduced rate VAT to solar installations. Italy has a reduced rate VAT of 10% for solar installations whereas Poland has one of 8% for rooftop installations. Why the 2013 EU ruling has suddenly become relevant at this point in time, when over half a decade has passed, has not been clarified. What’s more, the EC has since fundamentally revisited their stance on VAT. Only a year after their initial ruling the EC published their ‘Action Plan’ proposing to ‘modernise VAT in the EU’ as well as to ‘update the framework for VAT rates and set out options to grant Member States greater flexibility in setting them’. The Action Plan was followed up in January 2018 with a ‘Proposal on VAT Rates’ which sets out the EC’s ‘proposal to introduce more flexibility for member states to change the VAT rates they apply to different products’. This is in recognition that ‘the EU’s common rules on VAT rates do not treat Member States equally. More than 250 exemptions allow several Member States much more flexibility in setting VAT rates than others’. This legislative proposal has now been submitted to the European Parliament and European Economic and Social Committee for consultation and to the Council for adoption. Surely, given this, the perceived necessity of implementing changes in this area should be revisited, or at least justified? I’ve not even mentioned Brexit.

So, short of throwing out a proposal that is absurd to anyone concerned about climate change, what are the options? In an attempt to keep the cost of materials below the threshold, any form of % threshold is going to create a distortion in the market towards cheaper and smaller installations, both for solar and storage. If we are to accept the 60% threshold then the market for most storage as well as some solar only installations will face 20% VAT. The case improves slightly if the threshold is raised to, say 85%. However, although this would likely be preferable to a larger proportion of the solar and storage market it would still create a distortion, particularly against the more expensive storage products. Storage could be included on the list of energy saving materials, which would allow for storage installations to be installed alone and so the material element of the installation would be judged separately to solar against the 60% threshold. There are technologies on this list which HMRC has now proposed to exclude; wind and water turbines – which were rarely used by domestic homes anyway, so space has opened up on the list to include storage. However, even then the financial incentive to choose smaller, cheaper materials and installs will persist with a threshold. There is no satisfactory answer here.

If the Government is truly serious about tackling climate change the VAT rise plainly should not happen. Quite simply, the VAT for both solar and storage should be at 0%. At an absolute bare minimum, the status quo agreed before should be maintained alongside a serious reconsideration of the relief fossil fuels continue to receive.

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  • Gemma Stanley is a Policy Analyst at the Solar Trade Association.

    She holds a BA from Durham University and an MSc in Public Policy from UCL, during which her studies focused on regulation, climate change and the media’s influence on environmental behaviour. Before joining the STA, Gemma worked as a Regulatory Analyst at a renewable energy supplier and solar PV installer.