DECC proposal to reduce RHI heat demand limit to 25,000kWh
In its March 2016 Consultation Document, The Reformed Heat Incentive: A reformed and refocused scheme (Sections 5.16 – 5.24), the Department of Energy and Climate Change (DECC) proposes to introduce a heat demand limit for the Renewable Heat Incentive (RHI) of 25,000kWh for ground source heat pump installations, as it fears properties above this heat demand would otherwise be ‘over-compensated’.
Section 5.23 makes clear that this 25,000kWh limit relates to the Energy Performance Certificate (EPC) heat demand figure so must be adjusted downwards to establish the maximum number of renewable hours based upon any installations Seasonal Performance Factor (SPF).
This consultation for reforms to the RHI closed on April 27 2016.
Government is now reviewing the responses and is expected to publish the outcomes in late Summer 2016.
Most industry observers expect DECC to introduce heat demand limits. DECC’s policy decisions will then go through a parliamentary process before new regulations emerge, probably in early 2017.
Until such time, all RHI applications to Ofgem will be subject to the current regulations which do not include any heat demand limit.
Once accredited onto the RHI scheme, installations are subject to the rules that applied at the time of accreditation; so if you apply at the time of writing (April 2016), your quarterly payments over the seven year term will not be affected by any new regulations and ‘cap’ on the RHI.
For some considerable time, ground source heat pump installations have benefited from a reduced 5% VAT rate, all as explained in the HMRC Note 708/6 which can be found here.
In 2012, the EU challenged the right of the UK Government to levy reduced rate VAT in all cases permitted within Note 708/6. Ultimately, the European Court ruled in June 2015 that the Government was in breach of EU Law. The Government outlined its response here.
In brief, the Government conceded it had applied the tax relief too widely and, in some cases, had allowed relief even for some energy saving measures which did not meet all the requirements. Even so, it was clear that the Government was determined to allow reduced rate VAT as widely as possible, as detailed in the subsequent consultation.
Whilst there has been considerable resistance to the proposed changes, and it is clear Government has intent to try and maintain the reduced rate whenever possible, this consultation made clear that Government was obliged to increase the rate of VAT for many private householders unless they qualified under select criteria.
The Government has yet to publish its response to the consultation but has made clear that any changes would likely be introduced in the 2016 Finance Act.
It would appear there is some appetite to allow individual countries to have more control over VAT so many industry commentators are speculating that the VAT rise may not be forthcoming. As of April 13 2016, the only official HMRC response has been:
The government is reviewing the consultation, which focussed on whether the installation of all energy saving materials including solar panels, wind turbines and water turbines should continue to benefit from the current reduced rates of VAT, with a view to potential changes in the Finance Bill.
Further updates will be published as they become available.