Renewables face VAT hike

The government has proposed a 15% VAT hike for domestic solar panels and other renewable energy products after falling foul of EU rules.

The European Court of Justice ruled in June that Britain’s longstanding 5% rate on the supply and installation of energy saving products breached its VAT Directive, which only allows energy saving products to use a reduced rate in social housing projects, or as part of a social policy.

To comply with the rules, HMRC has launched a consultation on proposals which will see products such as insulation and wood-fuelled boilers remain at the reduced 5% rate, but will mean renewable energy products such as rooftop solar panels and wind turbines will have to move back to the standard 20% rate.

The government will look to keep the 5% rate by justifying it under another part of the VAT Directive, which allows a reduced tax rate for energy saving products which “renovate” a property and is currently used in France.

In the consultation document, HMRC said items such as solar panels therefore have to be excluded as “their installation cannot properly be said to ‘renovate’ a property (rather, they simply serve to generate electricity).”

Richard Twinn, policy advisor at the UK Green Building Council, said the news that products such as insulation remaining at 5% VAT was “actually very encouraging” and meant the government’s energy efficiency policy, despite the tax increase for renewables, was in “a better position than last week.”

He added: “It is a kick in the teeth for the solar industry, but frankly it’s still better than nothing.”

Lauren Cook, policy analyst at the Renewable Energy Association, 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.”

The consultation on the new VAT rates closes on 3 February 2016, with the changes set to come into effect on 1 August 2016 if approved.