VAT hike puts brakes on home solar and batteries

Less than two weeks after outgoing Prime Minster Theresa May declared that the UK will achieve its new ‘Net Zero Carbon’ goal by 2050, a jubilant renewable energy industry was quickly pulled back down to earth. 

HMRC announced that, from 1 October, VAT on home solar PV and solar-battery systems will increase sharply from 5 per cent to 20per cent.

The PM’s Net Zero announcement positioned the UK as a world leader in the fight against climate change. This latest move, however, somewhat contradicts that commitment.

Our Net Zero commitment still stands, of course, and it is still expected to herald more de-centralised renewable energy installations

It could also further destabilise the UK’s renewable energy industry, which was left wounded by the recent removal of the Feed-in Tariff. 

Our Net Zero commitment still stands, of course, and it is still expected to herald more de-centralised renewable energy installations and accelerate the electrification of infrastructure, but the transition to a carbon-free future will be hampered by this VAT hike.

The labour component of solar and battery installations – the cheapest part – will remain taxed at 5 per cent. The new rate will apply to material costs, which in general are the most expensive part of an installation. This will most likely have a negative effect on a key part of the energy mix needed to balance the grid and enable more ‘self-consumption’ by members of the public. 

Meanwhile (and worryingly for our Net Zero target), VAT rates for home gas and coal supplies will remain at 5 per cent.

I find it disappointing that, despite clear and definitive guidance from the Committee on Climate Change, and overwhelming consensus in the scientific community (and in the general population), the government still went ahead with this decision.

The official rationale is that, according to EU law ruled in 2015, the discounted tax rate was illegal to begin with. However, the government did not enact any changes to the VAT rate at the time, and the European Court of Justice has since published a VAT action plan (2016) without comment on solar power. It is perhaps telling that the new rates are due to come into effect the same month that the UK is to leave the EU.

ECA will continue to encourage government to make it clear how they intend to support industry in making the shift to a carbon-free future, and will continue to recommend actions that work for the benefit of both business and the environment.