The European Commission (EC) has published an Action Plan on VAT, which the solar industry hopes will support Ministers' indicated intentions to apply a reduced rate of 5% VAT on solar PV and solar thermal panels.

The EC intends to give national governments 'more autonomy' in how they grant lower rates of VAT. The EU executive has put forward two possible options on how to do this. The first is to set a broader EU-wide list of products to which reduced rates can apply. The second is simply to give, within a set of general principles, national governments the power to set their own reduced rates of VAT. Both will result in greater flexibility on VAT.

Last month, a cross-party amendment to the budget led to positive statements from senior Ministers such as Energy Secretary Amber Rudd and Treasury Minister David Gauke, ahead of the EU VAT reform, suggesting the UK would retain the low 5% rate of VAT for solar. However, the Solar Trade Association (STA) has been unable to get confirmation of the decision directly from the Treasury.

Leonie Greene, STA's head of external affairs, said: "The domestic solar market is undergoing challenging adjustments and both the industry and householders need to know that there will be no unfair increase in solar VAT. What we need is a clear statement from Treasury to confirm the industry can count on the positive statements already given by Ministers.

"It would be a nonsense to impose VAT on solar at 20% while retaining 5% for grid electricity, gas and oil. The EU decision today shows a clear intention to increase flexibility for member states on VAT decisions. Post the Paris Climate Agreement, the political priorities the EU says will inform the new VAT regime will surely include the need to rapidly decarbonise our energy supply."

The Commission’s communication describes how the EU VAT Directive is 'becoming obsolete' and how it has led to the Commission having to take over two-thirds of EU countries to court in what it calls unnecessary litigation. One such case is the European Court of Justice ruling that the UK's rules on VAT on energy products were not in line with EU law, which triggered the proposal from HMRC last December to increase VAT on residential solar from 5% to 20%.

The Solar Trade Association has estimated that an increase in VAT from 5% to 20% would add £900 to the cost of a typical residential solar PV installation.

The full EC action plan can be downloaded from: