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VAT break given to solar and energy storage projects

The solar industry and those developing energy storage projects were handed some good news last month, with HMRC confirming a VAT break for those involved in residential storage projects.

HMRC confirmed to the Solar Trade Association that the reduced 5% VAT rate (rather than the normal 20%) can apply to developers installing a storage system alongside a new solar PV system in residential accommodation.

The reduced rate applies to the installation of "energy saving materials" in residential accommodation and the supply of those materials by the person installing them. "Energy saving materials" includes solar panels, wind turbines and water turbines – but not expressly storage systems.

Now HMRC have confirmed – after extensive lobbying – that the 5% rate is also available for storage systems provided that they are supplied and installed alongside solar panels. HMRC have warned that the concession is on the understanding that the battery is linked to the solar panels and ancillary to the supply of the solar panels. In other words, the 5% rate would not be available if the batteries were sold separately and then fitted to existing solar systems.

Still, this is a welcome concession to an important and sometimes controversial issue. In 2015, the government proposed to scrap the 5% rate altogether for solar panels, wind turbines and water turbines, which would have led to a significant VAT hike for developers of these projects, and thus likely to have increased costs for homeowner end users. After much protest, the proposals were eventually dropped and there has been no suggestion that the government plans to revisit them. 

Developers of renewables projects in residential accommodation are therefore able to take advantage of the lower rate to reduce their costs. Firstly, the lower rate means that they can make the relevant equipment more affordable (and thus more marketable) for their customers and end users. Companies engaging a developer to build out such a project may find themselves paying VAT at 5% rather than 20% – even where the VAT is recoverable, this is a significant upfront saving as well as boosting cashflow. Secondly, where the VAT is not recoverable by a developer, it follows that such VAT costs will be reduced if the VAT rate is at 5% rather than at the 20% rate. 

It is easy for the availability of the reduced rate of VAT to be overlooked so it is important for the VAT treatment of any renewable energy project (including storage) to be considered at the outset. This is particularly the case with regard to the reduced rate since it can be highly valuable, in terms of affordability for end users, competitive edge over other developers, VAT cashflow and in potentially reducing VAT costs. It is welcome that the reduced rate is now seemingly here to stay and that HMRC have accepted that it can apply in an energy storage context.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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