The looming climate disaster is the most pressing issue of our times. The failure to meet the challenge will lead to a domino effect. Numerous other issues, such as climate induced migration, water scarcity, food shortages, ocean acidity, threats to biodiversity and both financial and political shocks will threaten the fabric of societies across the globe. I cover the impact of different levels of global warming and the steps needed to prevent it in a previous blog ‘What lies ahead and how we can stop it? It is obvious we cannot adopt a ‘wait and see’ approach.
An increase in household renewable energy production is just one of the many carbon emission reduction projects that will be needed to meet the UK’s 2050 zero carbon emission target. This blog discusses how to incentivise an increase in production by lowering VAT rates on domestic energy saving and renewable energy products.
In September 1997, a reduced rate of 5% VAT was introduced for household fuel and power, the standard rate at that time being 17.5%. This reduced rate of 5% was extended to a number of other items over the following years, such as car seats and sanitary products from 2001. The list of energy saving materials included solar panels (from 2000), roof and wall insulation, air and ground source heat pumps (from 2004/5). It is worth noting that the reduced VAT rate did not apply to battery storage, unless installed at the same time as solar panels.
In June 2015, the European Court of Justice ruled that the UK government, through their application of the reduced 5% rate of VAT, had infringed EU rules . Following this judgment overt he next four years there was significant discussion in Parliament about what to do, including a view that, as the UK was to shortly leave the EU, why not ‘kick the can’ down the road a little longer until a time that EU rules no longer apply. This is covered in greater detail by a House of Commons Library VAT on solar panels briefing document.
Following prolonged debate, in April 2019 the government introduced legislation to amend the scope of the 5% VAT rate to be compliant with EU VAT law. This legislation reduced the availability of the reduced rate to those in residential accommodation aged 60+, housing associations, or those receiving certain benefits. It also maintained the reduced rate where “the cost of materials does not exceed 60% of the cost of installation.” For clarity ‘cost of installation’ is the total cost of the materials and the labour combined.
This legislation took effect from 1st October 2019. The government argued that this change would impact a very small number of installations. However, it was pointed out that the 60% threshold for materials means that in parts of the UK where labour costs are lower, this 60% threshold is more likely to be breached. Where this threshold is exceeded, only the labour cost element will qualify for the reduced 5% rate, the VAT on the cost of the supply of the solar panels being applied at the standard rate of 20%.
In practice any medium or high end installation is very likely to breach the 60% threshold, and in the case of battery storage installed at the same time as solar panels, the cost of the materials will exceed 60% of the cost of labour in virtually every case.
The application of the standard 20% rate of VAT on solar panel materials in the majority installations and on the application of 20% VAT on battery storage in virtually every installation disincentives domestic renewable energy production. This has been acknowledged by the government when they were discussing extensions to the reduced rate here.
Using my solar panel installation as an example (a 5kW system) installed without battery storage:
Cost of Goods (ex VAT) £5638.10
Cost of Labour/Services (ex VAT) £2,800
Total Cost (ex VAT) £8,438.10
The cost of the goods was therefore 67% of the total cost and would have been charged at the 20% rate, had it been installed after 1st October 2019, incurring an extra £845 in costs to the customer. A significant disincentive to installing renewable energy.
Using my battery storage installation as an example (Tesla Powerwall) installed at a later date than the solar panels, which do not benefit from any reduced VAT rate when installed separately (and would be virtually certain to breach the 60% material threshold if installed at the same time as solar panels):
Cost of Goods (ex VAT) £5,800
Cost of Labour/Services (ex VAT) £1,200
Total VAT charged £1,400
If VAT was charged at 5% there would be a saving of £1,500 to the customer.
The EU is no longer bound by EU law and as as Jesse Norman said in June 2019 when he was a Treasury Minister “It will be perfectly possible and not difficult for a future government to reverse the change by statutory instrument, in the usual way, after we leave the EU”.
I believe we should take all possible steps to domestic renewable energy generation, as one aspect of a raft of measures, to reduce our carbon emissions. This should be incentivised by reducing or preferably abolishing VAT on both the supply and installation of domestic renewable energy products. This should also include smart battery storage, which can act as ‘mini power stations’, storing renewable electricity and exporting it to the grid during peak demand. Both these elements can form an important part of the energy hierarchy, which promotes reduced demand through building design, energy efficiency and domestic renewable energy. As the Tory government axed the ‘Zero Carbon Homes’ plan in 2016 and have recently abandoned the ‘Green Homes Grant’ earlier this year, we have no time to lose.
This week I met with my local MP Richard Fuller and put the above case to him. I understand that this will be put in the form of two written questions to the relevant minister. I will be watching closely for a response.
9th October 2021
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