EU Court Decision Places The Green Deal Under Threat

A senior VAT consultant is warning that the viability of the UK government's Green Deal scheme to promote energy-efficient homes is under threat. This follows a European Union ruling on the VAT status of domestic solar panels.

Last week the EU's Court of Justice decided that an Austrian homeowner was entitled to register for VAT and therefore reclaim the tax paid on the cost of installing solar panels on the roof of his home.

If applied in the UK, this could open the way to some £150 million of VAT claims from the estimated 250,000 households who have already installed solar panels. It would also have major cost implications for the government's plan to have up to four million homes generating solar power by 2020.

Just as significant for the government's flagship energy policy, the ruling also reinforces an existing threat to its reduced VAT rate on energy-saving materials. Earlier this year the European Commission challenged the 5% VAT rate as a breach of EU rules.

By ruling that householders generating electricity from solar are in business, the European Court has now added weight to the Commission's argument, says Glyn Edwards, Senior VAT Consultant at global tax, accounting and audit information provider CCH - part of global information group Wolters Kluwer.

So far the UK government has defended the reduced VAT rate. A European Court ruling is unlikely before the end of 2015.

Its decision last week raises more immediate issues for the electricity sector and HM Revenue & Customs, as well as policymakers and householders, Glyn Edwards says: "This development will not be welcome in Whitehall. It seems that the government will need to completely rethink its strategy on how it funds household renewables."

The response of HMRC and the industry will be interesting, he adds.

"It will be an administrative headache for HMRC if thousands register for VAT and also for electricity companies who would have to process invoices from a multitude of small suppliers to the National Grid.

"People love a windfall and this looks like another opportunity. However, homeowners will need to seek professional advice and discuss the issue with their energy provider before acting," the CCH Senior VAT Consultant says.

Glyn Edwards adds: "One possible approach for HMRC might be to remove the exemption from direct tax that householders enjoy under the domestic microgeneration feed-in tariff."