VAT – a blow for energy-saving projects and a welcome appearance for Draft VADR?

17 November 2015

Ian Carpenter  

Despite the pledge by government that there will be no rise in VAT, that doesn’t stop the Chancellor tinkering around the edges. And there’s a good chance that consumers, housing associations, and not-for-profit organisations could end up a lot worse off as a result…

Notwithstanding the triple-lock tax clause specifying that rates of VAT will not rise, and there would be no detrimental decrease in the scope of the VAT zero rate and reduced rate during the term of this Parliament, this doesn’t prevent a change to the scope of VAT being made, specifically where such a change may be applicable following a court or tribunal decision, or in response to infraction by the EU Commission.

With this in mind, there are a number of VAT issues likely to be addressed in the Autumn Statement.

By applying VAT at the reduced rate of 5 per cent to the installation of energy-saving materials in residential property, the UK has been found to be in breach of European VAT law. The Autumn Statement is likely to announce the application of VAT at the standard-rate to the installation of all new energy-saving projects, commencing some time in 2016. This development will result in increased costs for consumers, housing associations, and not-for-profit organisations unable to recover VAT on underlying costs.

In response to the VAT tribunals’ decisions involving offshore-based VAT avoidance schemes, VAT legislation is likely to be amended enabling it to be charged on services ‘used and enjoyed’ in the UK. This means, for example, that the effective use and enjoyment of advertising services could be regarded as taking place in the UK, irrespective of where the recipient of the services is located.

To take account of VAT tribunals’ findings in building projects, and to reflect changes to permitted development rights, VAT legislation and policy is likely to change the extent that VAT zero-rating can be applied to the construction and/or conversion of buildings, including: 

  • conversions carried out under permitted development rights;
  • construction of buildings that retain or utilise parts of previously existing buildings;
  • dwellings formed from more than one building; and
  • changes to the VAT treatment of the construction of annexes.

As recent European Court decisions have cast doubt on HMRC’s developing policy aimed at restricting VAT recovery by charities and not-for-profit organisations, if we had one ‘wish’ for this Autumn Statement, it would be for the announcement of a formal consultation on the right to VAT recovery by charities in receipt of subsidies and grants.

However, what we are likely to see is an announcement aimed at strengthening the VAT Avoidance Disclosure Regime, which if nothing else, will give commentators the opportunity to compose ‘Draft VADR’ headlines.


Autumn statement 2015

Autumn statement teaser

The Spending Review and Autumn Statement has now been declared to Parliament. View our summary of the key announcements.

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