How VAT charging is changing from 1st October? Solar PV UK

How VAT charging is changing from 1st October? The rumours are true, from 1st October 2019 the way in which you can charge VAT on energy-saving materials (ESMs) in residential installations is changing.

What’s changing?

The VAT charged on ESMs used in residential solar installations will increase from the reduced rate of 5% to the standard rate of 20% – unless one of the following two criteria are met:
(1) Social policy conditions
(2) 60% test applied

Social Policy Conditions

As stated above, the reduced rate of VAT can still be applied if certain social policy conditions are met. These can be defined as either a ‘qualifying person’ (aged 60 over or in receipt of certain benefits), a ‘relevant housing association’ (for example social housing) or a ‘relevant residential purpose’ (such as children’s homes, care homes and student accommodation). The person commissioning or paying for the installation must be the person who meets one of the criteria and HMRC will request that the installer is able to evidence the condition met.

60% Test

If the above social policy conditions are not met, the reduced rate may still applicable to the installation of ESMs in residential accommodation where the cost to the installer of purchasing the materials (excluding VAT) is 60% or less of the total amount charges (excluding VAT) by the installer to the customer.

Full details of all the above changes and requirements can be found here

Examples in practise

(a) A business carries out a residential installation of solar panels combined with a battery. It pays £5,000 for the solar panels (ex VAT) and charges its customer £7,500 (ex VAT) for the installation. The cost of the materials to the business is 67% of the value of the supply the business makes to its customer, so the 60% threshold is exceeded. This means the business will need to separately identify the value of the materials supplied to its customer and charge VAT at the standard rate (20%) on the supply of those materials. The labour element of the supply will continue to qualify for the reduced rate (5%).

(b) Another business pays £2,000 (ex VAT) for solar panels and sells them on for £3,333 (ex VAT). Here the cost of the materials hasn’t exceeded the 60% threshold so she can charge the homeowner the reduced rate of 5% for both materials and labour.

Frequently Asked Questions Solar Power VAT rate

What about installations from 1st October using ESMs purchased before this date? Orders paid for or contracts agreed BEFORE 1st October will NOT be affected by the above VAT changes. HMRC may request evidence of ‘time of supply’ in the form of a dated VAT invoice.

As the materials are now subject to higher VAT but the labour remains at 5%, where do I apply my margin?

It is normal commercial practice to at LEAST recharge the cost of the materials on to the customer, commonly with a mark-up. But provided there is no artificial undervaluing of the materials (ie. you CANNOT sell on materials for cheaper than you bought them and just add margin to labour) then they will not challenge margin apportionment.

Solar PV is part of the list of ESMs, but storage isn’t, how does that work?

Installing solar and storage TOGETHER qualifies as a ‘single supply of the installation of ESM’ meaning ALL materials must be included in the 60% test – even though storage never qualifies for lower rate.

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