VAT increase on solar a ‘killer blow’ to industry

5th February 2016

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Naomi Simmonds

An increase in VAT for solar technology could prove fatal for domestic solar and undermine schemes to install arrays on the roofs of commercial buildings, the industry has warned.

Solar PV and solar thermal technology currently qualify for a reduced rate of VAT for energy saving materials. However, HMRC has proposed removing this after a ruling last year by the Court of Justice of the EU (ECJ) that found the reduced rate was a breach of the VAT Directive.

In a consultation published in December, HMRC outlined plans to increase VAT paid by installers of solar, wind and hydro technologies, from 5% to the full 20% rate from 1 August 2016.

However, the Solar Trade Association (STA) pointed out in its response to the consultation that HMRC is not proposing to remove the reduced rate from another eight technologies that benefit from it, including heat pumps and biomass boilers.

The tax authority claims solar, wind and hydro technologies do not qualify under the EU’s rules for reduced rates. These stipulate that technologies given a reduced rate must be used in the ‘provision, construction, renovation and alteration as part of a social policy’ and in the ‘renovation and repairing of private dwellings’.

The STA argues that solar technology can fulfil both of these requirements. For example, solar thermal serves the same purpose as other qualifying technologies that supply domestic hot water and space heating, and is often installed in conjunction with the renovation of a hot water system or as a complement to heat pumps and biomass boilers.

Meanwhile, solar PV has contributed to the reduction of fuel poverty as local authorities and social landlords have installed the technology on more than 100,000 roofs across the UK, the organisation pointed out.

The VAT increase would add around £900 to the cost of installing a typical domestic 4kW rooftop system, the STA claimed. The solar industry is already suffering job losses caused by the government’s subsidy cuts and the impact for many solar businesses from an additional drop in demand ‘could well be terminal’, it said.

‘It is not too strong to say that the VAT increase could well be a killer blow for both [solar] technologies for the forseeable future,’ its consultation response stated.

The VAT increase would only apply to domestic solar installations, and would not directly affect commercial rooftop solar or solar farms. However, the STA warned that the entire solar supply chain would be damaged by the move.

Mike Landy, head of policy at the association, said: ‘You can argue therefore that the decision on VAT will indirectly affect other parts of the solar PV market.

‘Equally, if the energy and climate department (Decc) does as it has suggested and raise the feed-in tariff rate for domestic solar to compensate for higher VAT, this leaves less money in the pot for commercial rooftop and ground mount solar,’ he added.

HMRC’s consultation closed this week.


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