Farmers and landowners employing small-scale renewables technology for commercial use are not eligible for 5% VAT installation rates, Saffery Champness has warned.

The much-publicised 5% VAT rate for installation of renewable heating and other technologies is only applicable to domestic schemes – farmers using renewables for commercial use are required to pay 20% VAT, said the company’s head of renewables, Shirley Mathieson.

“Failure to pay the correct rate could result in unintended consequences and a significant shortfall in VAT due,” she said.

The anomaly has arisen from the two-tier VAT system for the installation of small-scale technologies, including air- and ground-source heat pumps, biomass boilers, micro combined heat and power, solar panels and wind turbines.

“This is especially relevant to those in the rural sector such as farmers and landowners installing, for example, a biomass boiler for their own domestic use and who have a plentiful supply of homegrown wood fuel,” said Mrs Mathieson.

“Provided the system is solely for domestic use, a reduced VAT rate of 5% does apply and covers the installation and goods supplied by the installer. However, as soon as the system is deployed to heat buildings other than residential the higher 20% rate is applicable.

“Anyone who is concerned that they may have fallen into the VAT trap and that they have not paid enough VAT should take proper advice.”

Self-catering accommodation is classed as residential by the HMRC and eligible for the 5% VAT rate, she added.

However, following an EU ruling, any community/charity renewables projects will see the reduced 5% VAT rate increased to 20% in August 2013.

“Those wishing to push ahead with heating projects still have a window of opportunity until then to take advantage of the lower VAT rate for installation,” added Mrs Mathieson.