The VAT due on solar panels will increase by 15% this October in accordance with EU state aid rules, the Treasury announced this week.
This decision follows a House of Commons vote to declare a climate emergency, which called for urgent action on green industrial investment. VAT on solar panels and installation is currently set at 5%. However, come October the VAT on the panels themselves will rise to 20% with installation remaining at the current rate.
Fuel poverty researcher at Glasgow Caledonian University, Dr Keith Baker, expects the consequence of this to lengthen the period of time it will take for consumers to make back the cost of installation which will be “a further deterrence for people”.
Baker stated: “As well as adding to the cost, you are adding to the length of time that installation will take to pay itself back whether on money you are saving on your energy bills or money you are making from exporting electricity.”
In addition, he explained that the VAT will add “almost a fifth on to the cost of the final bill which means your payback period is going to be almost a fifth longer”.
Following the Government’s decision to close the renewable energy feed-in tariff scheme in September last year, the investment in solar technology fell significantly. The tariff scheme provided subsidies for solar panel owners enabling them to sell electricity back to the grid at the same rate that they paid for it.
Baker anticipates the tax increase to set the UK further away from meeting its climate targets by deterring consumers from investing in solar panel technology.
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“This is decades of a lack of incentivisation, lack of investment, lack of promotion,” he explained. “Solar technology needs to be a massive part of our energy mix at all levels. And it is particularly under-utilised in Scotland”.
However, Baker also highlighted the need for flexibility surrounding the issue of EU state aid rules, which were cited by HMRC in justifying the increase in VAT. A European Court of Justice ruling in 2015 found that energy-saving material should not receive a reduced rate of tax.
“Competition law itself is not a bad thing, it is a good thing in many ways,” Baker said. “But this is one area where it is running up against the greater good. It will have implications for developing community-owned heat networks in Scotland and we don’t think the EU has got its head around this.
“This is just one more example of a tension that will continue to play out as we try and face down these massive climate problems.”
Baker’s comments come as the Common Weal Energy Research Group, of which he is a member, published a new report on Tuesday regarding how to decarbonise Scotland’s electricity network.
Commenting on the VAT hike, Dr Craig Dalzell, head of policy at Common Weal, also said that it was not “fit for purpose”.
He added: “The world really needs to wake up to the impending climate emergency and the urgent need for reform across multiple fronts including construction and energy generation.”
Dalzell called for policy and lawmakers to “urgently reform” and consider “whether policies like this VAT increase are fit for purpose in the current times”.