Solar PV Prices Slashed After FIT Change

larkim

OK, VAT-101. You can reclaim VAT incurred on expenditure which is made in the course of a business making a VATable supply. So in the ordinary world, you pay £100 plus VAT to aquire a widget, you improve the widget, and sell it for £150 plus VAT. You recover the £20 you paid in VAT on the original purchase, but pay over to HMRC the £30 in VAT on the sale. Effectively VAT is a tax on the margin, so the £10 net VAT cost that HMRC get is 20% x £50 "profit" that you made on the widget.

Complicating that a bit further, if you spend £1000 plus VAT on a machine which helps you to improve widgets, then in the quarter after purchasing the machine you will be able to recover the £200 VAT on the purchase of the machine. Over the longer term you will seek to recover the cost of that asset by charging proportions of it to your customers (in a simple example, perhaps the machine is capable of working up 1000 widgets, so if you wanted to directly recover that £1000 cost you would be charging £1 per widget to account for that as part of the price you sell widgets at. That £1 would attract output VAT and would be payable over - so after 1000 widgets were made HMRC would have got back £200 in VAT to offset the £200 they refunded to you earlier).

Now stretch that analogy to solar panels. Effectively they are a machine which "makes" power and which is sold to the grid. The VAT link I posted before shows that the FiT explicitly is outside of the scope of VAT. If your business just earned FiT income, then you would not be able to recover any VAT on the purchase of solar panels as in the course of your business you are NOT making a VATable supply. However, the VAT document above does say that the export tariff IS a VATable supply. So a business may be able to recover some or all of the VAT incurred on buying equipment that helps it to make this VATable supply, namely the solar panels.

(However, to complicate matters further, there are complex rules about partial exemptions where part of a business does something vatable and another part of it does something non-VATable, so it could well be that only part of the VAT on the solar panels is recoverable. Their accountants would be busy trying to persuade HMRC that this proportion is as large as possible!!)

HTH!

Matt

zeupater

larkim wrote: »

OK, VAT-101. You can reclaim VAT incurred on expenditure which is made in the course of a business making a VATable supply. So in the ordinary world, you pay £100 plus VAT to aquire a widget, you improve the widget, and sell it for £150 plus VAT. You recover the £20 you paid in VAT on the original purchase, but pay over to HMRC the £30 in VAT on the sale. Effectively VAT is a tax on the margin, so the £10 net VAT cost that HMRC get is 20% x £50 "profit" that you made on the widget.

Complicating that a bit further, if you spend £1000 plus VAT on a machine which helps you to improve widgets, then in the quarter after purchasing the machine you will be able to recover the £200 VAT on the purchase of the machine. Over the longer term you will seek to recover the cost of that asset by charging proportions of it to your customers (in a simple example, perhaps the machine is capable of working up 1000 widgets, so if you wanted to directly recover that £1000 cost you would be charging £1 per widget to account for that as part of the price you sell widgets at. That £1 would attract output VAT and would be payable over - so after 1000 widgets were made HMRC would have got back £200 in VAT to offset the £200 they refunded to you earlier).

Now stretch that analogy to solar panels. Effectively they are a machine which "makes" power and which is sold to the grid. The VAT link I posted before shows that the FiT explicitly is outside of the scope of VAT. If your business just earned FiT income, then you would not be able to recover any VAT on the purchase of solar panels as in the course of your business you are NOT making a VATable supply. However, the VAT document above does say that the export tariff IS a VATable supply. So a business may be able to recover some or all of the VAT incurred on buying equipment that helps it to make this VATable supply, namely the solar panels.

(However, to complicate matters further, there are complex rules about partial exemptions where part of a business does something vatable and another part of it does something non-VATable, so it could well be that only part of the VAT on the solar panels is recoverable. Their accountants would be busy trying to persuade HMRC that this proportion is as large as possible!!)

HTH!

Matt

Hi

I understand .... but consider the following ...

For a single RaR installation the likely cost is say £5k+VAT and would be expected to produce somewhere around 2500kWh.y and there is no immediate sale in sight to offset the full 20% VAT paid on the goods, a value of £1000.

Your explanation of recovering the VAT on capital equipment purchases in the quarter after the purchase assumes a revenue stream which includes VATable sales which would exceed the VAT liability on the capital purchase .... I believe this to be the point made .... however, the revenue stream is associated to the FiT payment calendar, which importantly is quarterly .... there will likely be no VATable 'sales' at all within the first quarter before the HMRC payment falls due.

Let's now consider the time taken to recover the £1000 of VAT which is due for payment. If the VATable element of the FiT scheme is applicable to the deemed export value and VAT on domestic energy, which is 5%, then the likely annual value of the VAT would likely be around £1.85/year (((£1.031-(£0.031/1.05))/2)x2500), therefore over 500 years (1000/1.85) to accumulate the VAT to offset the VAT payable in the next quarter .....

Is it not more likely that, in a case where the RaR company has no other sales revenue streams, the asset would need to be taken onto the books including VAT as there's nothing to effectively offset the tax against ?

As said earlier, I am interested ...

HTH
Z

cotleigh

grahamc2003 wrote: »

If a vat registered company charges more vat from its cutomers than the vat it pays to its suppliers, then it pays the difference to the Vat authorities. The reverse is also true, those who pay out more vat than they take in get a vat refund every now and then.

Yep, the clue is in the name: Value Added Tax. If a VAT reg business buys £100K + VAT of stuff, and sells it for £200K + VAT, they pay HMRC the VAT on their profit.

larkim

zeupater wrote: »

Your explanation of recovering the VAT on capital equipment purchases in the quarter after the purchase assumes a revenue stream which includes VATable sales which would exceed the VAT liability on the capital purchase .... I believe this to be the point made .... however, the revenue stream is associated to the FiT payment calendar, which importantly is quarterly .... there will likely be no VATable 'sales' at all within the first quarter before the HMRC payment falls due.

Yes, but there is no requirement to have "enough" VAT to offset any reclaim - if you are owed VAT, HMRC repay this based on your quarterly return, no matter how much the amount (provided it is calculated properly!!)

zeupater wrote: »

Let's now consider the time taken to recover the £1000 of VAT which is due for payment. If the VATable element of the FiT scheme is applicable to the deemed export value and VAT on domestic energy, which is 5%, then the likely annual value of the VAT would likely be around £1.85/year (((£1.031-(£0.031/1.05))/2)x2500), therefore over 500 years (1000/1.85) to accumulate the VAT to offset the VAT payable in the next quarter .....

As above, the net amount is the net amount, whether it is a payment or a refund. So the length of time over which it takes to recover the cost is largely irrelevant. I've not dealt with detailed VAT for a number of years, so I can't remember what the effect of the fact that the FiT payments are "outside the scope" of VAT is - though I think that this income may be completely disregarded for the purposes of calculating VAT partial exemptions; which might mean that from the HMRC's perspective all of their sales (i.e. the export of electricity from their panels to the grid via my house for which they charge the export tariff) may be VATable which would allow them to reclaim all of the VAT on the installed equipment.

Matt

zeupater

larkim wrote: »

Yes, but there is no requirement to have "enough" VAT to offset any reclaim .....

Hi

Okay .... following that we have a situation where the RaR provider would probably never have sufficient VAT to operate on a net basis and any future expenditure (maintenance etc) would therefore also be reclaimed .... with this sort of loophole in the tax system allowing under-recovery of VAT it's no wonder that europe as a whole is in such a bad state regarding balancing the books .....

Z

larkim

I can see your point, but that's the way its supposed to work. There are all sorts of industries where weird and wonderful VAT issues arise, some beneficial to the company, some beneficial to HMRC. In the end HMRC (via the government and limited to some extent by the EU) make the rules in the way that they seem fit, and overall the market-place adjusts to it recognising that VAT is in fact a cost (for example for health and social care charities, or for banks) for some business, and utterly irrelevant (other than an compliance issue) for most. The point is that VAT in its essence was designed to be a tax on consumers.

I can't imagine that HMRC are losing too much sleep over RaR companies, most of which I presume also trade as installers, consultants and contractors in related industries (including installing solar for a fee, general electrics, heat & lighting, etc etc), and for whom RaR may only be a small (if currently active) part of what they do.

Also, bear in mind the various cash flows - when a solar equipment manufacturer sells panels to a RaR company, they will sell it for, say £5000 plus VAT, and therefore at the quarter end will have to pay £1000 over to HMRC. The RaR company, presuming it can recover VAT, will simply pay £5000 plus VAT to the supplier, and then recover £1000 of that from HMRC through the VAT return. In the end, HMRC just ends up with £nil, but may have been able to hang on to that £1000 over a quarter end between the sale and the purchase, so the govt does get some benefit from it.

All fascinating stuff :rotfl: :rotfl:

Matt

Cardew

larkim wrote: »

I can't imagine that HMRC are losing too much sleep over RaR companies, most of which I presume also trade as installers, consultants and contractors in related industries (including installing solar for a fee, general electrics, heat & lighting, etc etc), and for whom RaR may only be a small (if currently active) part of what they do.



Matt

Some are solely RaR companies and are not small.

A Shade Greener has already installed over 5,000 systems and will have an annual revenue of around £7million - inflation linked for 25 years.

By 12 Dec I suspect it will be close to 6,000 systems and they have indicated that they will continue to install RaR systems at the newer rate of 16.8p/kWh.

wuthton

VAT is riddled with grey areas.

If you order some Prunus spinosa from me for hedging the price will be plus VAT.

If you order some Sloe berry plants from me for growing fruit the price is zero VAT, same plants as above.

I've had a few wick farmers who have legitimately avoided paying VAT on their farm hedging.

SunReader

Cardew wrote: »

Welcome to the forum.

Firstly you are incorrect in stating the "now accepted 25% reduction in electricity use". IMO you are referring to the "now accepted 25% of generated electricity is used in the house".

e.g. if your panels produce, say 2,800kWh pa, you use 700kWh in your house.

In my all electric house I use, say, 20,000kWh pa. Using your definition would mean I would save 5,000kWh pa - which would be difficult if you only generate 2,800kWh pa.

Secondly explained in post #21 the rate per kWh has no relevance.
The Tier 1 allocation of high priced units is in effect a standing charge( as would be a tariff with a daily standing charge).

Taking the car analogy in post 21, say you had standing costs of £1000 pa(tax, insurance maintenance) and spent £1000 pa on petrol for 5,000 miles pa your cost per mile would be 40p

Cut your mileage by 50% to 2,500pa your cost per mile would be 60p.

The average energy usage of a uk household is around 3800 to 5000 kWh, using 950 -1250 kWh a year generated from your solar panels is pretty realistic. Your example of 20 000 kWh is totally misleading and for an average house, a lot of small businesses don't even use that...£2,500 a year plus vat!

A 25% reduction in metered electric consumption is a pretty good estimation imo, people working from home, retired, shift workers etc could use much more of their "free" electric and get even bigger savings.

As for the VAT issue, currently MCS registered installers pay only 5%, anyone else pays 20% so buying your own panels and hiring subcontractors won't save any money imo.

As for quantity discounts, most tangibles have a discount structure, but with home energy it seems wrong to encourage conservation whilst at the same time offering discounts to heavy users. A good analogy would be that supermarkets shouldn't offer bulk discounts on alchohol as it encourages heavy drinking.

I've noticed that there is a lot of misleading info on these forums from people who don't really know what they are talking about, also a lot of anti-solar bias from certain poster's. One regular poster on this subject claims to have worked for the national grid yet cannot even use the correct units for electrcity consumption. But it is all healthy debate; that's what forums are for.:T

zeupater

SunReader wrote: »

The average energy usage of a uk household is around 3800 to 5000 kWh, using 950 -1250 kWh a year generated from your solar panels is pretty realistic. Your example of 20 000 kWh is totally misleading and for an average house, a lot of small businesses don't even use that...£2,500 a year plus vat!

A 25% reduction in metered electric consumption is a pretty good estimation imo, people working from home, retired, shift workers etc could use much more of their "free" electric and get even bigger savings.

As for the VAT issue, currently MCS registered installers pay only 5%, anyone else pays 20% so buying your own panels and hiring subcontractors won't save any money imo.

As for quantity discounts, most tangibles have a discount structure, but with home energy it seems wrong to encourage conservation whilst at the same time offering discounts to heavy users. A good analogy would be that supermarkets shouldn't offer bulk discounts on alchohol as it encourages heavy drinking.

I've noticed that there is a lot of misleading info on these forums from people who don't really know what they are talking about, also a lot of anti-solar bias from certain poster's. One regular poster on this subject claims to have worked for the national grid yet cannot even use the correct units for electrcity consumption. But it is all healthy debate; that's what forums are for.:T

Hi & Welcome to the forum ....

The average energy usage for a UK household is what ???? :rotfl::rotfl:

More likely, for a dual fuel user it's 3300kWh for electricity & 16500kWh for gas heating ..... in households with all electric, non-heatpump, heating then it's pretty safe to assume that the 16500kWh of gas would be displaced by around 15000kWh (~16500*.9) of electric heating due to relative conversion efficiencies, therefore 18500kWh of energy requirement for a year, not far from a personal example based on 20000kWh ...

As Cardew correctly pointed out, there is a difference between 25% of 3300kWh & 25% of 20000kWh .... anyone care to comment and provide a logical argument that there isn't ? ...... probably not

Regarding the VAT discussion, I think that you have missed the points which were being discussed. They have nothing whatsoever to do with end user purchasing or subcontractors, RaR being a sector related to the provision of panels on a roof by a scheme operator in order to attract FiT tariff payments from consumers leasing their roof for 25 years, for which they are allowed to use any generation for free ....

I don't really follow the 'quantity discounts' part of the post .... are you refering to the multi-tiered pricing structure operated by the energy suppliers ? .... If this is the case then the difference between tier 1 & tier 2 is that tier 1 includes what used to be called the 'standing charge', a cost which is related to the fixed costs of operating an account and maintaining the physical link and equipment on site, once the cost has been recovered the cost of the energy reverts to a pricing level where these costs are not amortised.

HTH
Z