The Department of Energy and Climate Change has opened the door to a potential review of feed-in tariff rates revealed last week should HMRC follow through with plans to increase VAT in August 2016.

Last week’s consultation response and accompanying impact assessment outlined that feed-in tariff rates, to come into effect on 8 February 2016, had been designed to deliver a return on investment of 4.8% for solar PV.

The response document outlines how the department has retained the right to alter rates under a budget reconciliation clause should deployment either far exceed or fail to meet expectations.

However the impact assessment also reveals that because the results of HMRC’s consultation on proposals to reset the VAT rate to 20% as of 1 August 2016 has not yet concluded, the 4.39p/kWh rate had been set “assuming no changes” to the current VAT regime.

HMRC’s consultation follows on from a European Court of Justice ruling that found the UK’s 5% discounted VAT rate afforded to energy saving materials – including solar panels – to contravene EU VAT directives and ordered it to be changed.

The 20% VAT rate would add circa £900 to the cost of an average domestic installation. A price increase of that amount would have a significant impact on the rate of return, therefore bringing into question the FiT rate’s ability to deliver a 4.8% return.  

When questioned on whether or not the department would revisit the feed-in tariff rates in the future to ensure they maintain a 4.8% return, a spokesman said that the department would “consider whether there are grounds for reviewing the proposed tariffs following implementation” and that an update would be forthcoming in Q1 2016.

The spokesman reiterated that because the outcome and implementation of the VAT changes has yet to be determined, it could not be included in the government’s FiT decision.