In a recent case, the Court of Justice of the European Union (CJEU) ruled in favour of an Austrian householder, after he successfully argued that the solar panels installed on the roof of his home amounted to “economic activities” for the purposes of EU VAT laws.
VAT expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that the decision could cause problems for UK tax authority HM Revenue and Customs (HMRC).
“This is an intriguing decision from the CJEU which could, potentially, see thousands of ordinary homeowners registering for VAT in order to claim back tax incurred by them when purchasing solar panels,” he said. “It is likely to be an unwelcome development for HMRC, both due to the potential cost to public finances and the burden of processing thousands of VAT registration applications.”
The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy in the CJEU, arguing that the tax incentive goes “beyond the scope” of the law. The VAT Directive only allows member states to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive.
VAT is applied to supplies of goods and services made by a “taxable person”, meaning a person who independently carries out an “economic activity … whatever the purpose or results of that activity”. The Austrian tax authorities had argued that the householder, Mr Fuchs, used more energy than the amount he supplied to the network so did not make a profit from the supply. However, the CJEU ruled that this was irrelevant.
“It is clear from the order for reference [by the Austrian tax tribunal] that (i) the electricity produced by the photovoltaic installation at issue in the main proceedings was supplied to the network and (ii) under the contract granting access to that network, remuneration was provided as consideration for that supply,” the CJEU said in its judgment.
“It is clear both from the wording of [the VAT Directive] and the case law of the Court that, for a finding that the exploitation of tangible or intangible property is carried out for the purpose of obtaining income therefrom, it is irrelevant whether or not that exploitation is intended to make a profit. Given that the installation on the roof of the house which is used by its operator as a dwelling produced electricity which is fed into the network in return for remuneration, it must be held that the exploitation of that installation is carried out for the purpose of obtaining income therefrom,” it said.
The fact Fuchs supplied electricity to the network in exchange for income “on a continuing basis” under the contract meant that the supply was an “economic activity” for the purposes of the directive, the CJEU said.
“That finding is not undermined by the fact, noted by the referring court, that the amount of electricity produced by that installation is always lower than the amount of electricity consumed by the operator in meeting his household needs,” the court said.
Depending on HMRC’s response to the judgment, UK householders wishing to become VAT registered for these purposes would probably be able to do so voluntarily, VAT expert Darren Mellor-Clark said. However, before attempting to claim the “apparent windfall”, householders would have to bear in mind “the impact which being registered for VAT could have on any other sources of income of which they may be in receipt, especially self-employed individuals”, he said.
“Registration for these purposes is likely to be on a voluntary basis and is usually effective from the date of the request or such earlier date as may be agreed with HMRC,” he said. “Potential claimants should consider the date of registration carefully, along with the date on which the panels were purchased. UK law only allows a four year retrospective window for claims in relation to VAT incurred before the date of registration.”