The government has released plans to ensure reduced VAT is maintained on energy saving materials (ESMs) following a judgement earlier this year by the European Court (CJEU) that called for a 20% rate to be applied to all products.
Currently, the UK applies a 5% rate on the installation of ESMs in residential buildings, which the CJEU deemed to be in breach of European rules which stipulate the reduction should only be used on work carried out as part of social policy. This meant that all ESMs benefitting from the reduced rate was faced with the threat of rapidly increasing costs.
However, the government has published a new consultation outlining its plans to retain the reduced rate on all measures previously covered, with the exception of solar panels, water turbines and wind turbines. If introduced, the proposals would ensure a 5% VAT rate was kept on products used not only for use in meeting ‘social need’ but also for housing associations and other buildings used solely for residential purposes, such as care homes.
Under the plans, the 5% will be available to standard residential buildings with the exception of instances where the cost of materials exceeds the cost of installation. In these cases, the reduced rate will only be applied to the installation costs, with the materials element facing a full 20% for VAT.
According to HM Revenue and Customs (HMRC), it is expected that the reduced rate would still apply for the majority of the time as the cost to the customer of the materials installed will usually be lower than the cost of labour.
Energy generating products have been excluded from the consultation as they are not deemed to be part of a renovation of a property.
The consultation will run until 3 February 2016 and if implemented, the changes will come into effect on 1 August as part of the Finance Act 2016. According to HMRC’s tax impact assessment, the Exchequer is set to pocket £310 million from the new rules which are estimated to impact around 3,000 businesses who will incur small one-off costs.