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VAT tax hike for energy saving materials scrapped

The Government has scrapped proposals to increase VAT on a list of energy saving materials, including solar PV, from 5 to 20 per cent.

The Government has scrapped proposals to increase VAT on a list of energy saving materials, including solar PV, from 5 to 20 per cent.  

The five per cent reduced rate of VAT is applied to the installation of energy saving materials in residential accommodation, including:

  • Controls for central heating and hot water systems
  • Draught insulation for windows and doors
  • Insulation on walls, floors, ceilings, lofts or for water tanks, pipes or other plumbing fittings
  • Solar panels 
  • Wind turbines and water turbines
  • Ground-source and air-source heat pumps
  • Micro-combined heat and power (CHP) units
  • Wood-fuelled biomass boilers.

Proposed changes

In 2015 the Court of Justice of the EU ruled that the reduced rate of tax was not consistent with European law. 

Under proposals published in December 2015, the rate would have returned to the standard 20 per cent for solar panels, wind turbines and water turbines, as well as for other instances where material costs were higher than labour costs for the installation. 

According to the Solar Trade Association (STA), the move would have added £900 to the cost of a typical 4kW domestic solar installation.

U-turn

However, following cross-party opposition to the move, the Government has signalled that the reduced rate of tax will remain as it is for the time being.

The U-turn is good news for the renewables industry following large cuts to government subsidies in recent months. 

According to the latest data from the Department of Energy and Climate Change (DECC), just 11MW of new solar PV capacity was installed in February 2016. This represents a 92 per cent drop in installations compared to the same month in 2015. 

‘Encouraging signals’

Leonie Greene, head of external affairs at the Solar Trade Association (STA), said: “The signals coming from Government appear to be very encouraging.

“We hope that Treasury will issue an official statement confirming the Government’s intention as soon as possible. What prospective solar homeowners and the industry need more than ever is certainty.”