The energy saving sector has expressed approval of the government’s plans to retain a 5% VAT rate on the majority of energy saving materials (ESMs) that currently benefit from a reduced tax.
HM Revenue and Customs (HMRC) yesterday released a consultation outlining its response to a ruling from the European Court of Justice (ECJ) that found the UK was in breach of Category 10 of the European VAT Directive. It claimed the reduced rate, which is intended for “provision, construction, renovation and alteration of housing, as part of a social policy”, was being too widely applied to all ESMs.
The government’s response has been to introduce a broad category of qualifying criteria allowing the 5% rate to be applied to work done for anyone over the age of 60 or on one of several benefit schemes. Work carried out for housing associations or in buildings used solely for residential purposes, such as care homes, would also be eligible. It has also stated that the lower rate would continue to be applied to private dwellings unless the cost of materials is more than the cost of installation, whereby the full 20% VAT would apply.
Finally, solar panels, wind turbines and water turbines have been removed from the approved list of ESMs as the consultation document states: “Their installation cannot properly be said to ‘renovate’ a property (rather, they simply serve to generate electricity).”
An HMRC spokesman told Clean Energy News that the government received “considerable advice” on the proposals and is confident the plans will not “fall foul of the law again.”
The government’s attempt to save the reduced VAT rate for a number of materials has been welcomed by many who stated back in June, when the ECJ ruling was made, that the consequences of a full VAT rate would be severe.
Richard Twinn, policy advisor at the UK Green Building Council, said: “It was widely expected after the ECJ ruling that the reduced VAT rate would be almost completely removed. So it’s encouraging that the government has looked to keep as much of the lower rate as possible.
“There will be winners and losers under the new proposals, and they are yet another kick in the teeth for the solar industry. But for other parts of the energy efficiency industry that were expecting a significant tax hike in the new year these proposals will seem like a welcome early Christmas present.”
Jenny Holland, head of the Association for the Conservation of Energy’s parliamentary team, added: “This is a great deal better than we feared. Clearly the UK government would have been within its rights to jettison the 5% reduced VAT on ESMs and that’s not what HMRC are proposing.
“We’re more pleased than we expected to be but given the general policy backdrop whereby Green Deal and ZC standard was ditched, and given the very low level of energy efficiency ambition that the government is displaying at the moment, it’s a welcome but it’s a cautious welcome.”
Holland’s caution stems from the conditions placed on those that the work can be carried out for. She continued: “The reduced rate can be applied where the person for whom they are doing the installation is aged 60 or over or in receipt of one of nine different benefits. I have a real question over whether your average installer is actually going to find out any of those things on the basis that the customer is very unlikely to know in advance that they qualify for a reduced VAT rate because of their circumstances or their age. So I have a big question over the operability of that bit, not least because it’s a hell of a lot easier to slap the 20% rate on, mindful of the fact that extremely few people on these qualifying categories will be likely to know that they are eligible.”
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.