UK government U-turn on proposed solar tax hike

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A sense of anxiety has surrounded the U.K.’s domestic solar market since last June, as the government made palns to impose a 15% rise in value-added tax (VAT) on domestic solar panels, mandated by the European Court of Justice. However, an unlikely team of opposition parties and EU skeptic Conservatives has forced the government to retract its plans, by putting forth an amendment to the Budget, which the government has decided not to oppose.

VAT rise

The issue began last June, when the EU mandated a standard VAT rate to be applied to energy-saving materials and onsite renewables technologies. This would have resulted in VAT on domestic solar panels rising from a discounted rate of 5% up to 20%. This translates into a rise of GBP 900 to GBP 1,000 (US$1,280 to US$1,400) for a standard domestic system of 4KW. The U.K.’s tax regulator Her Majesty’s Revenue & Customs (HMRC) responded with plans to remove tax relief for solar panels.

The proposal faced stiff criticism from renewable energy groups and opposition parties alike, as it would not only have punished those trying to install clean energy in their home, it would have led to a system in which fossil fuels received a lower rate of VAT, and it could have led to the loss of thousands of jobs in the renewables sector.

"The solar tax would have punished families for doing the right thing and put at risk thousands of jobs in Britain’s solar industry," said Shadow Energy and Environment Secretary Lisa Nandy. “Now we need a cast iron guarantee, in legislation, that solar taxes won’t be raised and jobs in this crucial industry will be protected."

To resist the proposed tax hike, Labour put forth an amendment to the Budget, which would have exempt solar panels and other energy-saving materials from the VAT rise. It is an unusual tactic, that hasn’t been successful in the UK’s parliament since 1994.

Brexit conservative support

What made this measure particularly hazardous for the Conservative government, is the support that the amendment received from members of its own party, who also support the UK leaving the EU. At the end of last week, 12 Conservative MPs came out and backed the amendment to the Budget, arguing that national taxation powers should not be meddled with by the EU.

With a tight majority of only 17 in the House of Commons, this put the government in a precarious situation, as 9 rebellious MPs could have resulted in an embarrassing loss during the scheduled debate on Tuesday. As such, the government has now released a statement saying that it will not oppose the amendment.

“The signals coming from Government appear to be very encouraging, thanks to their statements that solar will continue to benefit from current reduced VAT rates and the announcement that the Government will not oppose the cross-party amendment calling for solar to get lower VAT,” said Sonia Dunlop, spokesperson for the Solar Trade Association

However, there has been nothing set in stone yet, and even if the government decides not to oppose the amendment, there are no guarantees how long the reduced level of VAT will remain for. “We hope that Treasury will issue an official statement confirming the Government’s intention as soon as possible, as HMRC is still in theory considering responses to the consultation on this. We also want to see the reduced solar rate of VAT in black and white in the Finance Bill later this year,” continued Dunlop.