Andrew Needham looks at the recent budget changes to the VAT treatment of energy-saving materials.
The liability of energy-saving materials (EMTs) and the definition of what actually counts as EMTs has changed a lot with a tightening of the definition of what exactly was eligible, following an ECJ decision in 2015 ((C161/14) European Commission v United Kingdom).
The result was that the UK had to change the law and remove the 5% reduced rate of VAT from the installation of most energy-saving materials. Among the items affected were microcombi boilers, insulation and solar panels.
Too generous
This case was brought by the EU Commission, who viewed the UK and Ireland’s approach as overly generous. The ECJ agreed with the EU Commission and ruled that the reduced rate on both installation services and the energy-saving materials themselves should be removed if the sales were not part of either “the provision, construction, renovation and alteration of housing, as part of a social policy” or the “renovation and repairing of private dwellings”.
In addition, even if the sales were part of the renovation and repair of private dwellings, the reduced rating would not apply if those sales include materials that account for a significant part of the value of the services supplied, which would certainly adversely affect the installation of solar panels.
In December 2015, HMRC released a policy paper detailing the proposed legislative changes and affected supplies made after 1 August 2016. The measure amended the reduced rate of 5% VAT on the installation of certain energy-saving materials retaining as much of the relief as permissible under EU law. The lower rate was retained for:
- the labour cost element only of a supply of installation where the value of the materials exceeded 60% of the total; however, this restriction did not apply where the customer was aged 60 or over or was in receipt of certain benefits; and
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the withdrawal of the reduced rate for the installation of solar panels, wind turbines and water turbines.
All change!
However, from 1 April 2022, UK legislation reversed the effects of the CJEC decision and introduced a temporary zero rate from 1 April 2022 for a five-year period to 31 March 2027, after which the VAT rate will revert to the 5% lower rate.
The measure also permanently removes the social policy conditions (supplies to persons aged 60 or over or in receipt of certain benefits, housing associations or installations in accommodation used solely for a relevant residential purpose) and the 60% test which businesses were required to consider determining the VAT liability of ESM installations prior to these changes and brings wind and water turbines back into the scope of the relief.
The list of qualifying ESMs will be expanded to include additional technologies, and the complex eligibility conditions have also been removed. The amount of relief available will also be increased through the introduction of a zero rate for the installation of ESMs in Great Britain.
The changes will reverse the 2019 legislative changes and widen the scope of the relief as set out below for installations of ESMs in Great Britain:
- The relief will no longer be restricted by the social policy conditions or the 60% test.
- Wind and water turbines will be added back to the list of ESMs.
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A temporary zero rate will be introduced with effect from 1 April 2022 until 31 March 2027.
Practical tip
Businesses involved in the supply and installation of materials and their advisers should familiarise themselves with these changes as they offer a significant saving for purchasers of ESMs.
