THE leading voice for solar in the UK is calling on the Government to scrap “perverse” HMRC proposals to change the way the reduced-rate of VAT is applied.

The Solar Trade Association (STA) has joined forces with other bodies representing the smart energy industry by signing a joint letter to Finance Secretary Mel Stride and Energy Minister Claire Perry.

There are concerns certain schemes will be put at risk under the proposals, both in regards to solar and other household renewables. The body sees this as in direct conflict with the declaration of a climate emergency by the UK Government earlier this month.

They say the proposals threaten not only to increase the cost burden on some households who wish to install solar and battery storage, they would also place a significant administrative burden on solar installation companies who have been navigating increasingly difficult market conditions.

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“We are deeply unhappy with these VAT proposals which fly in the face of the recently declared climate emergency,” STA director of advocacy and new markets, Léonie Greene. “While the bulk of solar-only installations will not be affected, collective purchase schemes and combined solar and battery storage schemes may be put at significant risk.

“This is particularly perverse when the Government is backing a smart energy system, which would see homes with storage helping to support the grid, saving the UK vast amounts of carbon and money,” added Greene.

Under the current VAT rules, the 5% reduced rate of VAT applies to installations of solar, and combined installations of the energy conversion method and storage, as solar is listed under the energy-saving materials and heating equipment list.

If implemented, HMRC’s proposals will lead to the cost of an installation being charged at the full 20% VAT rate but only in circumstances where the cost of the materials exceeds 60% of the total cost of the installation. Installations typically consist of two elements – materials and labour and solar has an exceptionally high requirement for skilled labour.

As the proposals currently stand, most solar-only schemes will comfortably fall below the 60% threshold. However, the most cost-effective collective purchase schemes, as well as more premium schemes such as those combined with more complex “smart” technologies are at risk. There is also a significant risk to installations of solar and battery storage as the material costs will likely often be over the 60% threshold.

Other signatories on the letter include Regen, Beama and The Association for Decentralised Energy. They say that, even if the HMRC proposals aren’t scrapped, the threshold for material costs must be raised to 85%, in order to ease the impact on the UK’s nascent battery storage and other smart power technology markets.

The HMRC proposals come four years after the European Commission’s (EC) ruling on how the UK applies reduced-rate VAT. In the years since, the EU has opened up the possibility of a significant reform of VAT – in April 2016 the

EC published a position paper proposing more flexibility for member states to set reduced VAT rates; in April 2019 the EC made the case for scrapping national vetoes for environmental tax changes.

Committee on Climate Change CEO Chris Stark said that the VAT proposals would hinder the UK’s ability to reach net zero. Speaking at a BEIS Select Committee evidence session, he said: “We will need to throw everything at this challenge, including onshore wind and solar for that matter. Anything that makes it harder is clearly not in line with the net-zero challenge overall.”

An HMRC spokesperson said: “The government is proposing changes which would keep as much tax relief as possible available for Energy-Saving Materials while ensuring UK rules are in line with EU law.”