Partner Article

Could generating green energy produce the VAT blues?

The Court of Justice of the European Union (CJEU) ruled last week that the sale of electricity generated by solar panels on, or adjacent to a private individual’s dwelling, falls within the concept of an ‘economic activity’ for VAT purposes.

This means that private individuals could register for VAT, charge VAT on the supply to the energy provider (or ‘grid’), and recover the VAT incurred on the costs of solar installations.

So far, so good. But if registering for VAT an individual would have to meet all the ongoing compliance obligations of a VAT-registered business by keeping accurate business records, filing periodic VAT returns and making regular periodic VAT payments to HMRC.

As well as this, the individual would also be considered a ‘taxable person’ in respect of any economic activity carried out by him. Even if the supply of goods or services are unconnected to the supply of electricity, the individual would have to apply VAT to these activities. For example, by registering for VAT because of his supply of electricity, an individual would have to charge VAT on his eBay transactions (conversely, a VAT registered eBay user would have to charge VAT on his supply of electricity to the energy provider).

A further ramification of this decision is that plumbers, electricians, window cleaners and any other individuals trading below the VAT registration threshold could find themselves liable to be registered for VAT if their income from these activities, plus the total value of their supplies to the energy provider, exceed the VAT registration threshold of £79,000.

Charities and social landlords might also be affected by this decision as the VAT implications of generating renewable energy will not be determined by whether the organisation has charitable status or is VAT registered, but by the total value of the ‘taxable’ supply to the energy provider. These organisations will therefore need to determine if these supplies:

• fall out with their ‘charitable’ objectives (and need to be undertaken by a subsidiary)
• are part of a ‘barter’ arrangement with the energy provider (e.g. by renting a roof and getting energy supplies in return);
• whether mean that they too will need to register for VAT as a result of the total value of the supplies they make.

While at first blush the CJEU’s decision seems beneficial - particularly for the individual involved in the case heard at the CJEU – the wider ramifications of the commercial supply of generating energy could leave some generating a VAT bill too.

This was posted in Bdaily's Members' News section by Baker Tilly .