Government led consultation on changes to reduced VAT rates for energy saving materials
**Update April 2016**
Last month, amendments to the Government’s Finance Bill to prevent the existing rate going up from 5% to 20% were strongly put forward to the Government. Minsters consequently agreed to allow their own legislation to be amended to give the Treasury the power to resist the EU VAT rules. In conclusion, the reduced rate continues to apply as before.
Last summer, the Court of Justice of the European Union ruled that the UK had failed to correctly apply the relief offered by European legislation on reduced rates of VAT. Following this, the UK must now comply with the judgement and amend its legislation that makes provision for the reduced VAT rate for energy saving materials. Consequently, the Government organised a consultation to discuss whether their proposed changes achieve the objectives and to evaluate the implications of the amended legislation.
European legislation permits the UK to have two different reduced rates of VAT, although the UK currently uses one reduced rate of 5% which is the lowest rate permissible. At present, this reduced rate is applied to the installation of energy saving materials in residential accommodation such as wood-fuelled boilers, solar panels, and air source heat pumps to give just three examples. However, the CJEU ruled that the UK has been applying the relief too widely, failing to restrict the benefit to certain social groups. The CJEU also judged the list of energy saving materials to include installations that did not constitute to the provision, construction, renovation or alteration of a residential property. The UK defended its legislation but following the CJEU judgement, the Government must now amend the relevant legislation in the Finance Bill 2016.
The Government wants to retain as much of the relief as possible while also ensuring that the UK is fully compliant with EU law. The consultation, which ran from 9th December 2015 through to 3rd February 2016, detailed the proposed changes and encouraged relevant bodies to contribute their opinions regarding the objectives and any potential problems. The proposed changes can be divided into three segments: i) installations complying with ‘social policy’ requirements, ii) other installations in residential buildings, and iii) changes to the list of installed goods included within the reduced VAT.
To comply with social policy, the consultation specifies that the reduced rate will continue to apply to supplies made to people living in dwellings with a social need (a qualifying person must either be aged sixty or over, or is in receipt of one or more benefits), to supplies made to relevant housing associations (eg. private providers of social housing, registered social landlords, and registered housing associations) and to installs in all buildings used for a relevant residential purpose (eg. residential accommodation for children, homes providing personal care for the elderly or disabled, and armed forces residential accommodation).
Regarding the second category, other installations in residential buildings, the reduced rate will also apply to supplies to non-qualifying persons living in dwellings. In the majority of cases, the reduced rate will apply to the whole supply as long as the cost of materials installed is lower than the cost of the labour element of the supply. If the cost of materials exceeds the cost of installing the goods (ie. labour charges), the reduced rate will be restricted to the labour element of supply. This is to comply with the EU law that states that a reduced rate can be applied to the ‘renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied.’
Changes to the list of the eligible energy saving materials are proposed. In order to comply with EU law, the UK needs to exclude certain energy saving materials from the reduced rate on the basis that their installation cannot be properly said to renovate a property, rather they serve to generate electricity. Items to be excluded from the list are: solar panels, water turbines and wind turbines.
The revised legislation, as drafted in the consultation, could lead to a different VAT treatment depending on the customer’s status. For example, for a non-qualifying person, different treatment will arise if the material costs exceed the labour installation costs because the installer will need to charge 20% VAT for the materials. If the material costs are less than the labour or if the customer is deemed to be qualifying person, a relevant housing association, or a building used solely for a relevant residential purpose, the whole supply will be entitled to the reduced rate. Those wishing to install solar panels, water turbines or wind turbines will notice a change, with the standard rate of 20% VAT being applied.
The UK is requested to implement changes ‘without any undue delay’. Consequently, the changes will be included in the Finance Act 2016 with the current intention that they will come into effect on 1st August 2016. It is hoped that this deadline will allow for sufficient time for those affected to adjust their work and practices. For all payments made before 1st August 2016 or for any signed contracts for energy saving material installs that take place after 1st August 2016, the current reduced rate will still apply.
To read the consultation in full, please click here.