This briefing summarises the impact of Value Added Tax (VAT) on residential solar and battery storage systems.
VAT is a tax collected by the Government. It is calculated as a percentage of the final sale price of some goods and services. The standard rate is 20%. This means, for example, that if you buy something to which VAT applies that is priced at £1,000 before VAT, then the total cost will be £1,200.
However, a reduced rate of 5% applies to a list of ‘energy-saving materials’. The purpose of this is to encourage investment in technologies which have a positive environmental impact – for example, by reducing the amount of power a building draws from the electricity grid.
Solar panels are included on this list because they help residential property owners generate their own, carbon-free electricity.
Until October 2019, VAT on installations of solar power with a battery storage system – allowing homeowners to save energy they generated for later use – was also charged at 5%.
However, the rules on VAT have since changed. Now, the reduced rate of 5% is only applicable to a solar and storage system where the cost of the equipment does not exceed 60% of the total cost of the installation. For example, the combined cost of the panels and battery in a £5,000 installation must not be more than £3,000 – 60% of the total cost of the project – for the reduced rate of VAT to apply. If installed as a standalone item, then batteries are also subject to the 20% rate.
Note that the VAT rates quoted only apply to equipment. The labour involved is always charged at 5%, highlighting how arbitrary the decision to exclude batteries from the energy-saving materials list is.
Very few solar and battery storage systems meet the condition above. As a result, the VAT regime unfairly penalises them. Anyone who wants to buy and install solar panels and a battery in their home must pay more than they would for other energy-saving home improvements.
Solar Energy UK members who manufacture and install battery storage systems have told us that this is a barrier to the development of the market. For example, one of our members highlighted that their research shows that lowering VAT would help encourage customers to opt for a battery system.
At the moment, the artificially higher price of the technology means potential buyers are being put off.
Homes with smart solar systems – including rooftop PV generation capacity, an energy storage system, and intelligent controls that allow them to use solar energy as efficiently as possible – could help the UK’s housing stock to eliminate the evening peak electricity demand. There is expected to be a major increase in household power demand from electric vehicles and heating in the coming years, and so it is important that smart home energy technologies are deployed to reinforce grid capacity.
How can this be addressed?
In October 2020, the Government announced that it would publish a strategy explaining how the entire economy can decarbonise in line with the UK’s net zero 2050 emissions target.
In light of this welcome commitment, the Government should harmonise the tax treatment of battery storage. As a minimum, it should add battery storage to the energy-saving materials list, returning the rate of VAT to 5%, and ideally it should except battery storage from VAT altogether.
This would help support the shift to energy-efficient homes, increase the savings available to electricity consumers, and reduce harmful carbon emissions.
It would also stimulate the market for green home improvements, helping to create jobs in the UK’s renewable energy industry. The demand for solar power and storage is proven, and so the supply chain can make a significant contribution to the UK’s green economic recovery: nearly a million UK homes already have solar power systems installed, while the market has proved very resilient to Covid-19. The latest data from the consumer standards body, the Microgeneration Certification Scheme, shows that demand for solar installations rebounded immediately after the Spring 2020 national lockdown.
This is unsurprising, given the financial benefits and climate impact installing a solar system delivers, and Solar Energy UK members are optimistic for the year ahead. One specialist battery storage manufacturer has also reported, for example, that the development of a market for whole house retrofit solutions that included battery storage could double their number of employees.
Replicating this across a fast-developing industry would help generate clean technology skills, experience, and knowledge, that would support the UK’s zero-carbon growth.
What is Solar Energy UK doing?
Removing VAT for solar and storage technologies is one of Solar Energy UK’s priorities for a green recovery. Our policy team has been calling for this change in its engagement with officials from the Government’s Department for Business, Energy and Industrial Strategy, the Treasury, and HMRC, and will continue to do so until the unfair tax treatment is remedied.
Members and consumers should write to us with evidence of the impact of the VAT regime on their businesses and decision-making, which will be fed into our engagement with Government.