In this blog, Segen provide a full breakdown of what the imminent changes to VAT legislation mean for your business.
The rumours are true: from 1 October 2019 the way in which you can charge VAT on energy-saving materials (ESMs) in residential installations is changing. As solar is a listed energy saving material this change means you will have to reconsider your businesses approach to VAT.
The VAT charged on ESMs, such as solar, will increase from the reduced rate of 5% to the standard rate of 20% – unless one of the following two criteria are met:
(1) Social policy conditions
(2) 60% test applied
Social Policy Conditions
As stated above, the reduced rate of VAT can still be applied if certain social policy conditions are met. These can be defined as either a ‘qualifying person’ (aged 60 over or in receipt of certain benefits), a ‘relevant housing association’ (for example social housing) or a ‘relevant residential purpose’ (such as children’s homes, care homes and student accommodation).
The person commissioning or paying for the installation must be the person who meets one of the criteria and HMRC will request that the installer is able to evidence the condition met (evidence could be a copy of the customers pension, benefit statement, passport or birth certificate). The relief only applies in so far as the residential accommodation is the qualifying person’s sole or main residence.
If the above social policy conditions are not met, the reduced rate may still be applicable to the installation of ESMs in residential accommodation where the cost to the installer of purchasing the materials (excluding VAT) is 60% or less of the total amount charges (excluding VAT) by the installer to the customer.
Full details of all the above changes and requirements can be found here.
Case Study Examples
Two examples to help you understand the new rules:
(a) A business carries out a residential installation of solar panels combined with a battery. It pays £5,000 for the solar panels (ex VAT) and charges its customer £7,500 (ex VAT) for the installation. The cost of the materials to the business is 67% of the value of the supply the business makes to its customer, so the 60% threshold is exceeded. This means the business will need to separately identify the value of the materials supplied to its customer and charge VAT at the standard rate (20%) on the supply of those materials. The labour element of the supply will continue to qualify for the reduced rate (5%).
(b) Another business pays £2,000 (ex VAT) for solar panels and sells them on for £3,333 (ex VAT). Here the cost of the materials hasn’t exceeded the 60% threshold so she can charge the homeowner the reduced rate of 5% for both materials and labour.
What about installations from 1st October using ESMs purchased before this date?
Orders paid for or contracts agreed BEFORE 1st October will NOT be affected by the above VAT changes. HMRC may request evidence of ‘time of supply’ in the form of a dated VAT invoice
As the materials are now subject to higher VAT but the labour remains at 5%, where do I apply my margin?
It is normal commercial practice to at LEAST recharge the cost of the materials on to the customer, commonly with a mark-up. But provided there is no artificial undervaluing of the materials (ie. you CANNOT sell on materials for cheaper than you bought them and just add margin to labour) then HMRC will not challenge margin apportionments.
Solar PV is part of the list of ESMs, but storage isn’t, how does that work?
Installing solar and storage TOGETHER qualifies as a ‘single supply of the installation of ESM’. This means that when solar and storage are installed together ALL materials must be included in the 60% test. When retrofitting storage onto an existing solar installation the VAT remains at 20% regardless of the cost of materials.
- Founded in 2005, Segen is a value added distributor and installer of renewable energy technologies. Since October 2010, Segen has concentrated on the distribution of Solar PV products and providing value added services to MCS Certified Installers. Our expertise and experience is being harnessed to create a progressive enterprise that will continue to deliver a reliable source of sustainable clean energy solutions to customers within the UK and beyond.