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The Court of Justice of the European Union (ECJ) has ruled that sales of electricity generated by a photovoltaic (PV) system owned by a private householder to an electricity generating company constitutes an economic activity for VAT purposes. This means that the householder was entitled to charge VAT and potentially to obtain input tax deductions for VAT on the installation of the PV system. This will mean that householders in the UK with revenue over £79,000 (a fairly large sum for most people) will be liable to VAT registration with HMRC.
The ECJ said that "economic activity" is wide and involves activities done in order to obtain income on a continuing basis. This is an issue of fact and all circumstances had to be considered, such as whether a house is both a private and economic thing. Here "income" means remuneration received for the activity, regardless of whether a profit was intended. In this case, the householder received income and the exploitation of the PV system was for the purposes of generating that income. Further, as the contract for supplying the network was for "an indefinite duration", the income was on a continuing basis. Therefore, the householder carried on an economic activity. It was irrelevant whether the householder used more electricity than he supplied. The case does not say how high the VAT registration threshold would have been for the householder, Mr Fuchs, but it seems that he was charging VAT on his “feed in” of power to the grid: it may be that he had already registered for VAT- voluntarily.
This decision accords with HMRC's view (see HMRC: VAT Supply and Consideration Manual: VATSC05224), but the potential burden of voluntarily registering for VAT purposes and accounting for VAT is likely to be unwelcome to private householders.
It is a classic case of where a court finds “helpfully” in favour of a party (here allowing the householder to reclaim VAT paid on the installation of the PV array) which has unintended and potentially adverse wider consequences. The case report indicates that under his contract he sold all his generated electricity to the grid and then bought back what he used, thus recovering 100% of his input VAT. Householders should carefully check their feed-in contracts on this point.
We expect that most UK householders will not register for VAT and would bear the input VAT as a cost and would not seek to recover it.
The ECJ case is an Austrian one:- Finanzamt Freistadt Rohrbach Urfahr v Unabhängiger Finanzsenat Außenstelle Linz (in the presence of Fuchs) (Case C-219/12).
This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.