EU VAT rules hit Energy Efficiency sector

Last month, the European Court of Justice ruled that the UK's current VAT rate on Energy Efficient products is illegal. Currently, installers of products such as Insulation and Solar panels charge VAT at a rate of just 5%. This is 15% lower than than VAT charged on the vast majority of other products and services sold...

Britain has benefited from the lower rate since April 2000 when it was introduced to help meet EU targets by encouraging householders to make their properties more Energy Efficient. However, the EU ruling has determined that the tax break only applies to social housing, not private domestic properties.

So how will this affect the UK Energy Efficiency industry? In simple terms, products will become more expensive because private householders are not VAT registered and will be unable to re-claim the VAT element. A typical Solar PV system costing £6,500 including VAT will cost almost £7,500. The payback period from electricity bill savings and the Feed-in Tariff will be extended from the current 8 to 10 years to around 10 to 12 years. Return on investment will also fall from a potential 12% to around 10%.

How could it affect schemes such as ECO and the Green Deal? ECO is a grant-based system where most qualifying customers can receive free Cavity Wall & Loft Insulation or a replacement boiler. It is likely that more customers may be charged a contribution towards the cost. The Green Deal is a loan attached to the property which is repaid through savings on energy bills and many products are installed without up-front costs to householders but this situation will no-doubt change.

Will it affect Free Solar? Yes, quite possibly because investors will have to pay more for the systems they install which will again extend the payback time and lower the return on investment. The Sun Edison PPA (Power Purchase Agreement) scheme allows homeowners to have a system installed and maintained free of charge then buy back the electricity produced at a lower rate than buying it from the grid. It is possible that these rates could therefore become more expensive.

The changes are likely to be introduced next year, although HMRC and other interested parties are investigating possible loopholes or other alternatives. Let's hope they succeed for the sake of the industry and the consumers who all benefit from the current rate.