Following the 2016 Budget debates, the government has said that it is withdrawing its proposals to levy VAT at the standard rate (20%), rather than the lower rate of 5%, on the supply of solar panels in certain circumstances.

HM Revenue and Customs had consulted in December 2015 on the proposals to increase VAT, in order to comply with EU law.

Last June the European Court of Justice found that the UK’s reduced VAT rate for supplies concerning energy-saving materials (items 1 and 2, Group 2, Part 2, Schedule 7A, Value Added Tax Act 1994) infringes Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (VAT Directive). The VAT Directive provides for reduced rates to apply only to the provision, construction, renovation and alteration of housing, as part of a social policy, and to the renovation and repairing of private dwellings but excluding materials that account for a significant part of the value of the service supplied. However, in applying the reduced rate to all supplies of:

Services of installing these materials, the UK’s rules were not adopted exclusively or principally for social interest reasons, within the meaning of EU law; and materials, without excluding materials that account for a significant part of the value of the service supplied, the UK’s rules breached the VAT Directive.

However, after cross-party opposition to the increase, the government has accepted opposition amendments to the Budget Resolutions which will enable Parliament to legislate with a view to preserving a lower rate of VAT (5%) on solar panels.

The European Commission is also due to publish proposals that give member states more flexibility to apply lower rates of VAT.

This is a very welcome U-turn for the already beleaguered renewable industry which faces great uncertainty ahead following the proposals to close the NIRO scheme.