The UK Government has proposed a massive VAT hike for solar panels and wind turbines.
The news comes as the European Commission said the UK’s legislation was not consistent with EU laws and referred it to the Court of Justice of the European Union.
The UK currently applies the reduced VAT rate of 5% for the installation of energy-saving materials (ESMs) in domestic properties, including insulation, heating controls, solar panels, wind turbines and ground and air source heat pumps.
Under the new proposals, solar panels, water turbines and wind turbines would be charged at the standard VAT rate of 20%.
HM Revenue & Customs (HMRC) has launched a consultation and is seeking views from interested parties until 3rd February 2016.
It states: “The measure is likely to affect fewer than 500,000 individuals (and households) and the impact on affected individuals (and households) is anticipated to be negligible.
“We estimate that there are roughly 3,000 businesses will also incur one-off costs updating their invoicing systems to account for the change in the tax rate… These costs are therefore expected to be negligible”.
The reduced rate will however continue to apply to those “who have a social need”, relevant housing associations and installations in all buildings “used solely for a relevant residential purpose”.
The HMRC document adds: “The revised legislation as drafted will mean that there could be a different VAT treatment depending upon the status of the customer (for example, whether or not the customer is a ‘qualifying person’).
“However, the different treatment will only arise in cases where the supply includes installed materials and the cost of the materials element of the supply is greater than the labour installation cost. All other supplies will be unaffected.”
The new proposals are expected to come into effect on 1st August 2016.
The Solar Trade Association claims the move could add £900 to the cost of a typical 4KW solar installation, which is currently around £6,400.
Head of Policy Mike Landy said: “This requires urgent action from both the UK Government in London and the European Commission in Brussels.
“Instead of just accepting the EU ruling, HMRC needs to push back and argue for solar to keep its reduced VAT rate. The Department of Energy and Climate Change and the Treasury also need to take this massive hike in end prices into consideration in their imminent decision on how far to cut the Feed-in Tariff for solar.”
The news follows DECC’s proposals to reduce support for solar panels earlier this year.