Uncertainty as VAT omitted from Renewable Heating Incentive guidance

22 December 2015

David Wilson

One of the most frustrating issues for businesses, and advisors, must surely be the lack of tax guidance when government departments announce new policies and incentive schemes.

A case in point is the tax issues relating to non-domestic Renewable Heat Incentive (RHI) schemes. Despite being around since 2011, it was only in October this year that guidance on the taxation of RHI payments appeared on the government website.

From this new guidance we have established that RHI payments are not a grant, but a tariff payable for every kilowatt hour of heat produced; that RHI payments to businesses (or traders) is a business receipt subject to normal income tax and corporation tax rules for receipts and deductions; that businesses receiving RHI payments cannot claim 100 per cent first year allowances on energy-saving plant or machinery for that system but, apart from this exception, can claim capital allowances on plant or machinery as normal.

One glaring omission from HMRC’s guidance is the VAT treatment of RHI payments. The issued guidance contains not a word, nada, zilch. Businesses therefore don’t know whether RHI payments received are outside the scope of VAT, VAT-inclusive, or even whether RHI payments accrue towards the VAT registration threshold.

It’s all very well HMRC stating that it’s incumbent upon taxpayers to get their tax affairs right, but frankly this is not good enough for those taxpayers reliant upon HMRC guidance to do so. Indeed, it reminds us of the lack of guidance on the VAT treatment to be applied to Feed-in-Tariffs. It was only after several years of presumption and individual guidance that it was eventually established that the ‘generation’ tariff was outside the scope of VAT, but the ‘export’ tariff was subject to VAT.

There is no doubt that government departments introducing policies and incentives are acutely aware of the ramifications of breaching EU State-aid rules; indeed, the recent report by MPs relating to the steel industry might indicate that the UK is overly sensitive to State-aid rules. But surely there must be inter-governmental discussions, and external publication, of the tax consequences of new incentives? Or is the case that publishing the tax consequences too early might deter participation in these schemes?

If you would like to discuss any of the issues further, please contact George Bull or your usual RSM contact.