HMRC has announced plans to increase the VAT rate on the installation of solar panels in residential accommodation to 20% with effect from 1 October 2019. This follows long standing infraction proceedings against the UK by the European courts who found that the UK had taken too wide an interpretation of the reliefs available for qualifying energy saving materials (ESMs). Whilst the UK tried to argue their case, the European courts agreed that the UK legislation was not fully compliant with EU law.
The changes have not gone as far as the original 2015 consultation proposed, and the reduced rate for the installation of qualifying ESMs (including solar panels) will continue to apply only in the following circumstances:
- customer is over 60 or in receipt of certain benefits
- customer is a registered housing association
- the building is a ‘relevant residential’ building, such as student accommodation or a care home
By further concession, the UK Government has legislated to allow the 5% rate for the full cost to be retained where these criteria are not met, except where the cost of goods element of the supply exceeds 60% of the total charged to the customer.
In such cases, where the cost of the physical solar panels total more than 60% of the total installation value, the 5% rate applies only to the labour cost of installing the goods with the remainder charged at the standard VAT rate of 20%.
Wind and water turbines have been removed from the list of qualifying ESMs and will now always be liable to the 20% rate of VAT. HMRC has also clarified that storage batteries are not ESMs and were always subject to VAT at the standard rate.
The implementation date of 1 October 2019 is likely to see a rush to enter into complete installations before this date. Those supplies paid for before 1 October 2019 and installed afterwards and supplies made after 1 October 2019 for which the contract was entered into beforehand will remain subject to the existing rules.
VAT is an EU tax and with Brexit still on the horizon the UK may have the power to revoke these changes in the future. As it stands, under the terms of the draft withdrawal agreement it is envisaged that the UK will remain compliant with EU law during the transition period. However, that may no longer apply if the UK were to leave the EU without a deal.