The Treasury vs Net Zero Carbon

UK homes account for around 15% of our CO2 emissions. A combination of improved energy efficiency and on-site renewable energy would reduce this, as was set out in the zero carbon homes plan, abandoned in 2016.

In 1998 a reduced 5% VAT rate was introduced for energy-saving materials such as solar panels, but this didn’t include battery storage unless installed at the same time as solar panels. You can read more about the timeline of VAT on solar panels from the excellent resource that is the House of Commons Library here: https://commonslibrary.parliament.uk/research-briefings/cbp-8602/

In 2015 the European Court of Justice ruled the UK had infringed rules on the application of VAT and eventually in 2019 (rather odd timing in light of our imminent departure from EU) the government introduced legislation restricting the application of the reduced VAT rate on energy-saving materials to those aged 60+ and/or in receipt of certain benefits, or when the cost of materials does not exceed 60% of the total cost of installation.

However, in combined solar panel/battery storage installations the cost of materials is likely to exceed the 60% margin on virtually every occasion. This means that the full 20% VAT rate will be applied, a clear disincentive for homeowners wanting to install renewable energy solutions.

Why is this a problem? Smart batteries linked to solar panels act like ‘low carbon’ mini power stations and can export energy back to the grid during peak demand. They reduce both domestic energy demand and reliance on fossil fuel sources. Further, they smooth out demand spikes and can be used to import and store electricity during low demand periods.

In June 2019 Treasury Minister Jesse Norman stated “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”.

Yet to date, this reversal has yet to happen.

in March 2021 the House of Commons Environmental Audit Committee released a report which discusses reducing or abolishing the VAT on energy saving materials. You can read the report in full here: https://committees.parliament.uk/publications/5171/documents/52521/default/

In the report, they discuss the issues around the rate of VAT on renewable energy products and installations and make (on page 45) the below recommendation in paragraph 132.

Extract from the Environmental Audit Committee report: Energy Efficiency of Existing Homes

However, the response from the Treasury talks about how any reduction in the VAT on domestic renewable energy would impact other areas of the economy. I have previously written about the issues around the level of VAT on domestic renewable energy which you can read here: https://julianvaughan.blog/2021/10/09/its-time-to-slash-the-vat-on-domestic-solar-energy/

I raised the government’s refusal to reduce the VAT on solar panels and battery storage with my MP Richard Fuller and he tabled a written question on the issue.

With Richard Fuller MP in October 2019 discussing VAT on solar panels

However, the response received in December 2021 mirrored that of the responses from the Treasury contained in the Environmental Audit Committee’s report above.

Written Answer from Lucy Frazer MP on behalf of the Treasury

However, as you can see the answer to the written question from Richard Fuller MP indicates that the Treasury are standing firm on their refusal to remove, or even reduce, the VAT on domestic renewable energy installations.

I would suggest that the long-term results from a lack of action on CO2 emission reduction will have a far greater impact on public finances than would a reduction in VAT on domestic renewable energy installations.

Further, the government’s VAT take is likely to be significantly increased by receipts from the sharp rise in the energy price cap which is set out in the table below. This sharp increase in VAT intake, from £61 up to £94 per customer, surely outweighs any loss in revenue from abolishing VAT on domestic renewable energy.

Table from the Default Tariff Cap Level letter. You can read the full letter from this link: https://www.ofgem.gov.uk/publications/default-tariff-cap-level-1-april-2022-30-september-2022

We really shouldn’t be sweating over the easy stuff. It’s bizarre that the Treasury is happy to cut the duty on domestic air travel and freeze the duty on petrol and diesel, but refuses to slash the VAT on renewable energy production. We have to do better than this if we are serious about achieving net-zero carbon.

Julian Vaughan 10th February 2022

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