HMRC continues to challenge VAT recovery by some businesses earning RHI payments, but there may be scope for those affected to maintain full input tax recovery on related costs.
The Renewable Heat Incentive (RHI) is a government financial incentive to promote the use of renewable heat. Under the scheme, homeowners and businesses are rewarded in the form of income payments as renewable heat is generated.
HMRC normally considers that a RHI payment represents non-business income and so should fall outside the scope of VAT. This means that businesses are not required to account for VAT on such income.
As a consequence of this tax treatment, HMRC has challenged some businesses’ entitlement to recover VAT incurred on costs used to generate RHI payments, arguing that those costs are not attributable to taxable business activities.
If this argument was successful, it could adversely affect the business’ ability to recover VAT on costs relating to the purchase, installation and maintenance of technology used to generate renewable heat (eg heat pumps, biomass boilers, geothermal and solar thermal equipment). The VAT at stake is often considerable and, so, any irrecoverable input tax can pose a significant cost for businesses.
While it has not published any guidance on the VAT position of the RHI scheme, we are aware of HMRC officers challenging past input tax recoveries on costs related to RHI income and, in some cases, raising assessments to disallow VAT claimed in the last four years. Should HMRC win this argument, there is a risk that interest and penalties would be payable in addition to the repayment of VAT previously claimed.
Depending on the business’s individual circumstances, in our view there is scope to support full input tax recovery on RHI related costs incurred to date. Businesses should also take steps to protect their position going forward.
Those that have already been challenged by HMRC should seek urgent advice - a detailed analysis of their situation may help to demonstrate that historic input tax recoveries remain valid.
Finally, if businesses are planning to set up a new accredited installation for RHI, they should seek advice to minimise the possibility of a challenge in the future.
Your next steps
For help and advice on this or any other VAT issue, please get in touch with your usual BDO adviser or Stephen Kehoe.