Increased VAT on solar panels and other energy saving materials

Despite the “triple tax lock”, the UK will be increasing the VAT rate for energy-saving materials from next year.

To be fair, this is at the behest of the European Commission (EC) who state that supplies and installation of energy-saving materials, which are currently subject to the reduced rate of VAT in the UK, must be raised to the standard rate of 20%.  On 9 December 2015 HMRC issued a policy paper stating that the VAT rise will be effective from 1 August 2016.

This increased rate of VAT will apply to the supply (by an installer) of solar panels, wind turbines, water turbines and all energy saving materials where the cost of the goods is greater than the labour cost of installing those goods. Other installations such as wood-fuelled boilers and certain pumps can continue to benefit from the reduced rate.  In requiring the UK to make this change, the EC stated that the UK VAT legislation does not accurately reflect the overarching European VAT legislation.  In the EC Principal VAT Directive, there is no specific reduced rate for energy saving materials, the relevant provisions being the “provision, construction, renovation and alteration of housing, as part of a social policy” and the “renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied” (Annex III, paragraphs 10 and 10a).  The UK legislation (Group 2, Schedule 7A, VAT Act 1994), whilst being more specific in allowing only the installation and supply of energy-saving materials, does not contain the additional restrictions required by the European legislation, namely where the cost of the goods must be less than the cost of the services to enable the reduced rate to apply.

The intended changes to the UK legislation will contain some exemptions from the standard rate (such as installations for the over-60s, those on certain benefits, relevant residential buildings and relevant housing associations), though past supplies will not be affected. The changes will therefore not be straightforward and those involved in the industry should consider carefully how their future supplies will be affected.

For further information and help on VAT and the appropriate rate of VAT, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.