The European Commission has yet to act on last year’s ruling by the European Court of Justice (ECJ) that the reduced rate of VAT on solar panels is illegal, and appears to have no plans to do so following the publication of a VAT action plan.
In a communication sent out last week, the Commission claimed VAT needs to be ‘modernised and rebooted’ as the current system requiring unanimity between all member states to make changes ‘presents a serious challenge’.
It proposes two options for reforming the current system, one of which would allow national governments greater freedom to set their own number of reduced rates, which are currently limited to two.
While this would be subject to the certain EU conditions, such as single market or competition rules, the adoption of this new rule would allow the government to maintain the 5% rate currently applied to solar products.
The document also recommends keeping the standard VAT rate but extending the list of goods and services eligible for reduced rates. These would be reviewed at regular intervals taking account of political priorities.
The options, which will be reviewed with member states over the next year, suggest a significant shift away from prescriptive VAT policy applied to member states such as the ruling made by the ECJ in June last year.
This claimed that the current 5% rate of VAT on energy saving products including solar panels failed to fall in line with EU policy and resulted in a consultation being launched by HM Revenue and Customs (HMRC). This proposed raising the rate to 20% on micro-generation technologies on 1 August as part of the Finance Bill.
Once the ECJ decision was made, the UK became subject to the Commission which decides if and when to act on the ruling. Balázs Lehóczki, spokesperson for the ECJ, told Solar Power Portal last month: “It is now for the European Commission rather than the Court itself to verify whether the UK fully executes the Court’s judgment.
“No communication took place regarding the issue between the Court and the UK. There could however be meetings between the UK and the Commission on the details of the Court’s judgment’s execution.”
Infringement proceedings can take years to process and as the proposals set out in the VAT action plan would see reforms made in 2017, an EU Commission spokesperson informed SPP there is little appetite to begin.
Patrick McCullough, taxation and customs spokesperson for the EU Commission, said: “We haven't been notified of any particular change in UK policy and VAT rates at the moment so it would be a long procedure even if it was started. By then there would be an agreement already on what the way forward would be.”
The contrast between the ECJ ruling and the current strategy of the Commission to provide greater freedom to national governments to set VAT rates puts into question the timeline for a government response to its own consultation.
It has already been over two months since the consultation closed and a response has yet to be made on paper. It was widely expected a final decision would be part of the Budget however both the Treasury and HMRC explained its absence by claiming responses were still being analysed.
With the Commission unwilling to enforce the ruling that caused the government proposals in the first place, there is now concern that a full response will not be forthcoming. As the proposals were not included in the Finance Bill, the August date of implementation is now irrelevant, removing any conceivable timeline for a decision.
Jenny Holland, head of the parliamentary team at the Association for the Conservation of Energy, told SPP: “My hunch is that they will kick it [a consultation response] into the long grass. They wouldn't have launched that consultation had it not been for the ECJ judgement; they wanted to carry on with their reduced rate as it currently stands. They had to react but
“Now that the backdrop is quite clearly changing at EU level, I would imagine that they will just go along merrily not responding to the consultation or their original proposals.
“My anticipation is that basically the UK government will sit on their existing consultation proposals, not implement them and wait for things to change at EU level as a result of the proposals in action plan - that's my hunch.”
The UK government has so far failed to put anything in writing regarding the decision, with only vocal assurances so far being made by financial secretary David Gauke and energy minister Amber Rudd that VAT would not rise.
The Solar Trade Association claims that until the decision is properly legislated, uncertainty will continue to dog the industry.
David Pickup, business analyst for the STA, commented: “There still hasn’t been that clarity that the industry needs in terms of what it can expect to happen and what the timelines are. There’s still a lot of confusion around and it’s very unhelpful when we have people saying there is VAT reform but no legislation or a clear statement that actually says that.”
If still implemented as part of the Finance Bill, the STA has estimated that an increase in VAT from 5% to 20% would add £900 to the cost of a typical residential solar PV installation.
A HMRC spokesperson said: "The government is reviewing the consultation, which focussed on whether the installation of all energy saving materials including solar panels, wind turbines and water turbines should continue to benefit from the current reduced rates of VAT, with a view to potential changes in the Finance Bill.
"The government has not legislated in the Finance Bill but has retained the scope of the current reduced rate as it is. It therefore remains in place and remains unchanged.
This story has been amended since it was first published to include comment from HMRC.