Solar PV owners set for half-a-billion pound cash windfall

The UK Government has confirmed that UK homeowners who have installed solar panels are in line for a huge cash windfall following a European Court ruling on a tax loophole.

A Treasury official confirmed to GreenWeek that the department’s months-long review of an obscure European Court of Justice (ECJ) judgement has now been completed and they concede solar panel owners are legally entitled to claim back up to £500 million of VAT repayments.

In a statement, the department say they will now allow households to claim back the sales tax “in relation to the purchase, installation, and maintenance and in respect of any incidental costs” as the Feed-in Tariff can now be considered as a “business activity”.

However, Chancellor George Osborne is expected to use his Autumn Speech next month to outline how the HMRC will clawback some of the money by reclaiming VAT on the electricity generated that is exported to the National Grid.

Treasury chiefs are desperate to avoid opening the floodgates to claims that will be an administrative nightmare as nearly 500,000 households are eligible to voluntarily register for VAT status to reclaim the payments.

They are hoping by claiming the VAT back on the export component of the Feed-in Tariff the Treasury will minimise the eventual loss and deter many households from tackling the red tape.

The situation was triggered by a ruling, known as the Fuchs decision, handed down by the ECJ in June that set a legally binding precedent across all member states.

A panel of judges stated that sales of electricity generated from solar panels to the national power company of Austria constituted a business transaction and the owner was able to register and reclaim input VAT.

Brian Garner, director of tax at Michelmores LLP, told GreenWeek that the Government was now liable to payout similar claims but had used the time until the Autumn Statement on December 3 to create a new tax framework that would recover some of the paid-out cash.

He explained: “The implication for UK homeowners who have installed solar PV panels is that they are entitled to register for VAT and claim back VAT paid on related costs.

“This may extend to more than just the cost of installation – for example, are roof repairs now partly recoverable? What does it means for VAT registered businesses operating from split home and work units, such as farmhouses – should recovery percentages now be revised upwards?

These are all questions that will need to be resolved in due course.

“For farmers, no doubt the NFU will revisit their guidelines on this topic and if they see fit issue amendments.”

Some commentators have forecast that the Treasury could lose up to £500m as a result of the decision, especially now as homeowners can reclaim the VAT element of maintenance of their rooftop panels over the 20 or 25 year period of the Feed-in Tariff contract.

And some fear another serious rethink of renewable energy taxation strategy is required.

Brian Garner added: “One possibility might be to remove the current exemption from direct tax which householders currently enjoy under the domestic micro-generation exemption. This would be the logical step as if it is argued that the generation is a business with recoverable VAT, the profits should be taxable. This would reduce and possibly negate any VAT saving.

“Concerns have also been raised about how HMRC will cope if thousands of homeowners simultaneously submit VAT registration applications. The power companies are also concerned as it could result in them receiving thousands of additional invoices from small suppliers to the National Grid which would be an administrative nightmare for them.

“Not surprisingly HMRC have been considering the implications of this decision since its release in June. It is too early to say definitely make a claim to recover the VAT but I expect all the details will be contained within the Autumn Statement.”

Other analysts fear that having only introduced their Green Deal initiative last year, which provides subsidiaries for green energy installations, the decision by the EU in this case could significantly undermine the government’s funding on solar energy. Brent Goodwin, VAT Manager at Chartered Accountants Newby Castleman, said: “The Court of Justice ruling found that the operation of solar equipment to sell back electricity to an energy network counts as an economic activity, meaning the owner could claim back the VAT on the cost of the initial system purchase.
“Such a ruling could mean big incentives for home owners looking to install solar panels, but implications for HMRC both due to the potential cost, but also the administrative burden of processing thousands of VAT registrations.

“Having said this it is still all very much up in the air when it comes to how the UK government will react and handle this decision. The verdict of this case also comes at a time when the EU is also trying to force the UK government to raise its reduced VAT rate on solar equipment from 5% to 20% and this ruling has thrown another complication in the government’s strategy on household renewables.” A Treasury spokesperson confirmed to GreenWeek: “As far as the UK is concerned, we have reviewed our treatment of this and in our view the judgment confirms our existing treatment.

“The Fuchs decision appears to confirm the current UK VAT treatment of supplies of renewable micro generated energy by householders.
“Such supplies when made for a consideration (Feed-in/Export tariff) are taxable. “In the UK, taxpayers only need to register for VAT where total taxable supplies exceed a set threshold (currently at £79,000 per annum).

“But they can also apply to register voluntarily where their supplies do not exceed this threshold.

“The householder is consequently then able to register for VAT and receive input VAT recovery in relation to the purchase, installation, and maintenance and in respect of any incidental costs, subject to the normal rules of input VAT recovery.

“They also have to account for output VAT in respect of the Feed-in/Export tariff they receive from the national energy company.”

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