Mitigating VAT on energy-saving installations

05 August 2015

Ian Carpenter 

The government has announced that it’s currently considering the implications of the European Court’s decision that the UK failed to comply with European VAT rules in universally applying VAT at the reduced rate of 5 per cent to the supply and installation of energy-saving materials for housing.

The decision means that, in principle, VAT on energy-saving materials such as micro-combi boilers, insulation or solar panels would have to be charged at the UK standard rate (currently 20 per cent). If the UK followed this decision to the letter, any increase in VAT costs will likely impact consumers, housing associations, charities and not-for-profit organisations that are unable to recover VAT on underlying costs.

The government has stated however that any legislative changes will not take place before Finance Act 2016, and until then, the installation of energy-saving materials will continue to bear VAT at the reduced rate. Interestingly, the government states that “any changes won’t apply to future supplies and will not apply to supplies already made”.

But what are the government’s options to ensure that changes to VAT rates won’t apply to future supplies of energy-saving installations?

It may determine that only social housing tenants can be provided with the supply and installation of energy-saving materials at a reduced rate. However doing so would mean owner-occupiers would have to pay VAT at the standard rate, as would private housebuilders, private landlords, and do-it-yourself builders constructing their own homes.

It’s noticeable that anyone wishing to sell or rent property, or receive payments under the Feed-in Tariff scheme for solar panels, must have an energy performance certificate (EPC) which costs between £60-£120. It’s logical to assume that anyone needing an EPC would wish to have energy-saving materials installed, if for no other reason than to have their property more attractive to a prospective buyer or incoming tenant. To mitigate any increase in VAT costs to the private sector, the government may therefore be considering an increase in the amount of grant-funding available via the likes of LESA, Warm Front, and the Home Energy Efficiency Scheme.

But while the government needs to find a more efficient way of promoting energy efficient materials while remaining in line with EU VAT law, the concern remains that any state subsidies could lead to further EU intervention down the line.