Treasury announces review of battery storage VAT anomaly
Solar industry celebrates as Treasury promises to explore whether to extend zero VAT rating
This week’s Budget may have left much of the green economy underwhelmed, but the solar and energy storage sector found some cause for celebration after the Treasury launched a call for evidence on proposals extending zero VAT rating for solar panels, heat pumps, and insulation to cover battery storage systems.
The new review is seeking views on whether to zero rate VAT on projects to either retrofit a solar photovoltaic system with an energy storage system or installed as a standalone unit, marking a victory for the solar industry, which had been calling for the move.
In his Spring Statement in March 2022, then Chancellor Rishi Sunak cut VAT on the installation of energy-efficient materials such as solar panels, heat pumps, and insulation from five per cent to zero – but excluded battery storage from the tax break.
However, the Treasury confirmed this week it would explore extending zero VAT to cover energy storage systems in response to “multiple requests” from both Parliament and trade bodies such as Solar Energy UK.
According to the trade body, adding a battery system to an existing solar array helps reduce emissions and energy bills, while also bolstering energy security, by allowing households to access clean power durign periods of peak demand, easing pressure on the grid.
However, under current rules, an exemption from VAT is only available when solar panels and energy storage systems are both fitted simultaneously.
Solar Energy UK added that discouraging energy storage upgrades makes existing solar homes and commercial premises more reliant on the grid, resulting in higher emissions and costs.
Advocating for an amendment to the Energy Bill that would remove the anomaly in September, Lord Foster of Bath said: “This does not really make sense. There should not be a fiscal incentive to install a battery at one time but not at another.
“We should not penalise homeowners and occupiers looking to protect themselves from the energy price crisis by adding batteries to their existing home solar systems as a stand-alone item to improve the benefits. Nor should we penalise those who could not afford to do both at the same time.”
Separately, Solar Energy UK welcomed the Spring Budget’s plan to introduce ‘full expensing’ for companies to write off the cost of investments in certain plant and machinery in one go – a measure the Treasury has confirmed applies to solar energy – and plans for £63m of funding to help swimming pools respond to soaring energy bills.
However, the group also bemoaned the lack of new investment in upgrading an “antiquated” electricity grid, which remains the biggest impediment to private sector investment in larger-scale rooftop and ground-mounted solar systems.
“While there are certainly valuable elements, not least on VAT for battery storage, and a short-term opportunity for solar thermal in swimming pools, the Budget was out of step with the mainstream trends in the global energy transition, where investment is pouring into solar, wind and energy storage,” said Chris Hewett, chief executive of Solar Energy UK.
“The Chancellor appeared to conclude ‘job done on renewables, now we will focus on CCS and nuclear.’ He’s quite wrong. The country is in dire need of public and private investment into reinforcing the transmission and distribution grids. The slow pace of upgrades is pushing the expected completion of some solar projects well into the 2030s. The sector is also suffering from having no investment allowance under the Energy Generator Levy, unlike the benefits showered on the oil and gas industry.”
The Budget was followed yesterday by confirmation from the government that the next clean power contract auction round has been given a £205m budget for contracts with wind, solar, and tidal stream developers.
However, the renewables industry warned the budget marked a reduction on the £285m awarded last year and fails to take account of the rising material costs faced by the sector.
