Andrew Needham looks at what energy-saving materials are subject to the 5% lower rate of VAT.
The reduced rate of 5% applies to the installation of specific energy-saving materials. Unfortunately, wind and water turbines were removed from the list of qualifying items following the revised legislation, which took effect from 1 October 2019. However, insulation materials, solar panels, ground and air source heat pumps, and micro heat and power units remain qualifying if the conditions outlined below are met.
The reduced rate applies whether or not the installation is grant-funded; and it includes the price of the goods themselves if certain conditions are fulfilled.
Social policy conditions
Installation services on their own are subject to the 5% reduced rate. In certain cases, the installation services and the energy-saving materials can fully benefit from the reduced rate where either a new 60% threshold is not exceeded, or one of the following social policy conditions is satisfied:
- The customer is over 60 or in receipt of certain benefits. The benefits are:
- Child tax credit (other than the family element).
- Council tax benefit.
- Disability living allowance.
- Disablement pension.
- Housing benefit.
- Income-based jobseeker’s allowance.
- Income support.
- War disablement pension.
- Working tax credit.
- The customer is in a registered housing association.
- The building or part of a building is used for a ‘relevant residential’ purpose, such as a care home.
Where the social policy conditions are not met, it is necessary to apply the 60% test to a supply of installing energy-saving materials to determine the correct VAT rate.
If the value of the energy-saving materials exceeds 60% of the total value of the full supply (installation and materials), only the labour cost element will qualify for the reduced rate (with the supply of the materials being standard rated). In practice, the 60% threshold is expected to affect mainly combined installations of solar panels and batteries.
These rules were introduced following the ECJ’s judgement of how the UK applied the reduced rating rules. Now that the UK has left the EU, it has not yet been determined whether the relief will be revised and reformed again, particularly given current ambitions on tackling climate change.
If a business supplies energy-saving materials without installing them, the supply is standard-rated. For example, the sale of energy-saving materials by a retailer is standard-rated.
Installing energy-saving materials with ancillary supplies
The installation of just energy-saving materials with ancillary supplies is reduced-rated, provided that any one of the social policy conditions is satisfied or the 60% threshold is not exceeded.
An ancillary supply is a supply of goods or services that is a better means of enjoying the principal supply (e.g., installing loft insulation but having to cut a new loft hatch in the ceiling and making good to access the loft). The cutting of the loft hatch and making good is, in itself, a simple construction supply, but as the services have been carried out solely in support of the loft insulation, they become ancillary.
However, if a supplier replaces an existing roof with a new insulated one, the insulation clearly is a better way of enjoying the new roof and so the insulation is ancillary to the new roof. As the supply of the roof is standard-rated, this applies to the whole job, including the insulation.
Practical tip
Businesses involved in the installation of energy-saving materials should ensure that their customers qualify for the 5% reduced rate and check if the 60% rule applies.
