“Thanks to Brexit, we are no longer constrained by EU law, so I can announce that for the next five years, homeowners having materials such as solar panels, heat pumps and insulation installed will no longer pay 5% VAT; they will pay zero.”
“Contrary to what Sunak said, there is already a VAT exemption on solar panels and heat pumps already happens in the EU, so this is not a benefit of Brexit. [sic]”
Labour MP Chris Bryant has claimed that the Chancellor was wrong to suggest the UK can reduce rates of VAT on solar panels and heat pumps “thanks to Brexit”, as zero-rating on these products already happens in the EU. At the time of writing, the tweet had been shared over 8,000 times.
But Mr Bryant’s claim isn’t true. The EU is planning to allow member states to set 0% VAT on solar panels from next month, but this rule change isn’t in effect yet. It also plans to allow states to set a VAT rate of 5% on low-emission heating systems, which includes heat pumps, but not 0%.
In some cases, EU homeowners can claim back VAT on solar panels as a business expense, but this is possible in the UK as well, and is not the same thing as a VAT exemption.
Also, while the UK was a member of the EU, the European Court of Justice did prevent the UK from reducing VAT on solar panels.
Therefore, even though the EU has now decided to follow the same course, there’s some justification for Mr Sunak saying that Brexit contributed to the UK’s ability to set VAT rates.
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How VAT in the EU works
The EU restricts member states’ abilities to set their own VAT rates.
Member states are required to have a standard VAT rate not below 15%.
They can opt to apply one or two reduced rates to a defined list of goods and services, but not reduce the rate below 5%.
Finally, there are some exceptions to the rule where states can set VAT below 5% on some goods and services, largely for historic reasons.
For example, some EU countries (and the UK before it left the bloc) had a 0% VAT rate on certain books and periodicals, by virtue of having such a rate prior to 1991.
What is the situation in the EU?
In December 2021 EU finance ministers agreed to update the EU’s VAT rules.
- Updating the list of goods and services to which member states can apply reduced VAT rates
- Making the goods and services that are exempt from VAT in some countries, exempt in all countries
The list of goods and services to which members can apply reduced rates (of at least 5%) is due to include a new item 22, which includes “supply and installation of highly efficient low emissions heating systems”, provided they meet emissions benchmarks. The European Heat Pump Association confirmed to Full Fact that this covers heat pumps.
The supply and installation of solar panels on private dwellings or on buildings in the public interest will be added to the list of goods and services qualifying for a VAT rate below 5% (and as low as 0%).
The new legislation does not mention any allowance for reduced rates on insulation, which the UK government has cut to 0%.
While the proposals have been published, they are not in force yet, and are not reflected in the current VAT legislation.
The new rules are expected to be formally adopted by EU finance ministers on 5 April. The new UK rules announced by the Chancellor take effect on 1 April.
When Full Fact asked Mr Bryant about his claim, he said he was told that Germany and Italy already have full VAT exemptions on solar panels and heat pumps and that France has no VAT on “energy saving products”. We’ve not been able to find any evidence of this. We asked Mr Bryant for more information but had not received a response at the time of publication.
It is possible Mr Bryant was referring to the fact that, because solar installations typically sell surplus electricity into the grid, residential property owners who install solar installations can, in some cases, register as businesses and claim back VAT on solar installations as a business expense. This is also possible already in the UK.
German solar installation company Zolar, for instance, explains that while residences can claim back the VAT on solar installations by registering as businesses, they must then pay sales tax on the electricity they produce for their own consumption and so, in Germany at least, VAT exemption does currently come with strings attached.
French energy firm Totalenergies says the VAT on solar panels can be charged at a reduced rate of 10% if the installation meets certain conditions.
Some EU countries also offer considerable subsidies which essentially cover the cost of VAT on solar installations. For example, Italy effectively pays people to install solar panels through a 110% subsidy scheme.
But what the UK is planning to do is quite different, in removing VAT from these installations entirely.
The Brexit back story
The Chancellor claimed that, thanks to Brexit, homeowners having equipment such as solar panels, heat pumps and insulation installed will no longer pay 5% VAT.
It’s true that, as part of the EU, the UK would not have been able to cut VAT to zero for insulation and heat pumps. However, under the new EU VAT rules, the UK would have been able to cut VAT on solar panels to zero.
Before Brexit, the UK tried to make solar panel installation available at reduced rates of VAT, but its efforts were rebuffed by the EU.
In 2015, the European Court of Justice (ECJ) said the UK’s application of a reduced rate of VAT on “energy saving materials” failed to comply with the EU’s VAT directive.
The UK had been applying a reduced 5% rate of VAT for solar panel installations under provisions allowing a reduced rate on the “provision, construction, renovation and alteration of housing, as part of a social policy” and the “renovation and repairing of private dwellings”.
The ECJ agreed with the European Commission that on installations under this second provision, a reduced rate could not be applied where materials accounted for a significant value of the service supplied.
The ECJ also said that the first provision permitted the application of a reduced rate to works on social housing or to services supplied as part of a social policy, not to all houses, as the UK had been doing.
In 2019, the UK subsequently legislated to maintain the reduced rate on solar panel installations on accommodation for elderly people, those on benefits and housing associations, as well as installations where the material cost was less than 60% of the total cost.
Then-Treasury minister Jesse Norman said: “The VAT treatment of the vast majority of solar panel installations is expected to be unaffected by the changes.”
Image courtesy of Tiia Monto