With the focus of the world firmly on sustainability, and in the midst of global soaring energy prices, it is perhaps unsurprising that the chancellor should choose the Spring Statement to announce measures to help make homes in the UK more energy efficient. But could, and should, the chancellor have gone further?
The measures announced came into force on 1 April 2022, and introduce a time limited zero-rate VAT relief that applies to the installation of energy saving materials (“ESM”) in residential property in England, Wales and Scotland.
Until the new measures came into force, existing VAT provisions did allow the reduced VAT rate of 5% to be charged on the installation of specified ESM or on the supply of the materials themselves when supplied by the person who also installed those materials.
ESM were specified in the law as meaning:
• insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings.
• draught stripping for windows and doors.
• central heating system controls (including thermostatic radiator valves).
• hot water system controls.
• solar panels.
• ground source heat pumps.
• air source heat pumps.
• micro combined heat and power units.
• boilers designed to be fuelled solely by wood, straw or similar vegetal matter.
However, the 5% rate would only apply where either the recipient was in receipt of certain state benefits or was over 60 years old (the “public policy” test), or if the public policy test was not met, where the value of the materials supplied was 60% or less of the total cost to the person to whom the supply was made. Where the value was over 60%, only the service element of the supply would qualify for the reduced rate. This made application of the reduced rate administratively difficult for suppliers, who had to ensure that proof was obtained and kept to evidence, for example, that the customer was in receipt of benefits or over the age of 60, or that the value of the materials did not exceed 60% of the value of the sale made to the customer.
The new measure applies VAT at zero-rate to the installation of ESM in England, Wales and Scotland, extends the meaning of ESM to also include wind turbines and water turbines (items that could not be included while the UK was part of the EU), and removes both the public policy test and the 60% test, making administration of the relief far easier that was previously the case.
As noted, the relief is time limited, and will only apply under the current law for supplies made on or after 1 April 2022 and before 1 April 2027. From 1 April 2027, the installation of ESM is due to revert back to the reduced rate of 5%. The public policy and 60% tests will not however be re-applied after 1 April 2027.
These measures will only apply in England, Wales and Scotland, but will not apply in Northern Ireland. This seems an odd position from a technical perspective. Northern Ireland remains bound to follow EU VAT law in relation to supplies of goods under the Northern Ireland Protocol, but not services - and installation services are very definitely a service. It may be that while negotiations continue around the Northern Ireland protocol, the government felt it would be best not to rock the boat.
But for whatever reason, the rules in Northern Ireland will continue to apply the reduced rate of 5%, will retain the public policy and 60% tests and will not initially extend relief to wind and water turbines.
The relief that applies to ESM will only apply where the installation of the ESM is the primary purpose of the contract. If installation is ancillary to wider works, the installation will follow the VAT liability of those works. For example, if a contractor is engaged to fully renovate a property, and as part of that renovation, ESM are installed, the supply of installing ESM from the contractor to its customer will not qualify for relief but will be subject to VAT at the standard rate as part and parcel of the renovation contract. In these circumstances, it may be better for the end customer to contract directly with the subcontractor installing the ESM to obtain the benefit of the zero-rating available.
Caution should also be exercised where component parts of a system are being supplied. For example, drilling a bore hole, installing a ground loop and grouting as part of a ground source heat pump would not appear to qualify for zero-rating under the law, as the supply is not the installation of a ground source heat pump.
The relief will only apply where there is installation of ESM. For anyone buying such materials for own use (e.g., installers purchasing materials to install, or DIY enthusiasts purchasing materials to improve the energy efficiency of their own homes) these will continue to be subject to VAT at the standard rate. This may create a potential cash flow cost for installers, and an absolute cost for individuals purchasing ESM which could put people off improving the efficiency of their homes due to the additional expense involved. The list of materials could be expanded to include for example components of a system that makes up ESM, or to include items such as double glazing. There are many older houses that may have double glazing installed, but these are unlikely to be as energy efficient as modern glazing. For many people, including housing associations and residential institutions that cannot claim back VAT on costs, the additional 20% VAT cost may make upgrading unaffordable. With the future of our planet at stake, it seems odd that the government should continue to tax items that could contribute significantly to lowering emissions.
Should the chancellor have gone further – the answer would appear to be a resounding “Yes!”
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