Reduced VAT Rate
Reduced VAT rate: What is it? When can it be applied? Which materials are eligible?
Here at Grant, we often receive enquiries from installers regarding the reduced rate of VAT. Consequently, we have outlined below a summary of which product installations are eligible for the reduced VAT rate which we hope will aid our installers with their forthcoming work.
The installations of certain energy-saving materials or heating equipment may be eligible for a reduced rate of VAT, this is 5% compared to the standard VAT rate of 20%.
If you are an installer of renewable energy appliances or grant-funded heating equipment, please read on.
Installing energy-saving materials
The reduced rate of 5% VAT applies to the installation of certain specified energy-saving materials in, or within the curtilage of, residential accommodation. (In this context, installation refers to the permanent fitting of energy-saving materials). This reduced rate is applicable whether or not the installation is grant-funded and includes the price of the goods themselves. Please note that if you supply energy-saving materials but do not install them, your supply is standard-rated (ie. 20% VAT).
Some of the energy-saving materials which are covered by the reduced rate are:
- Central heating and hot water systems controls
- Solar panels (including solar collectors together with associated equipment eg. circulation systems, pump, storage cylinders etc)
- Air source heat pumps
- Wood-fuelled boilers (including wood pellet boilers and, when a hopper is integral to the installation of a boiler, the hopper is also included within the scope of the reduced rate)
Other forms of energy-saving materials which are eligible for 5% VAT include: draught stripping, insulation, wind turbines, water turbines, ground source heat pumps, and micro combined heat and power units.
The energy-saving materials that are listed above are only eligible for the reduced rate of VAT if they are installed for use within any of the following types of residential accommodation:
- Houses, blocks of flats or other dwellings
- Armed forces residential accommodation
- Children’s homes
- Homes providing care for the elderly, disabled, or people who have suffered or are suffering from drug/alcohol dependency or mental disorder
- Institutions that are the sole or main residence for a minimum of 90% of their residents
- Religious communities including monasteries or nunneries
- Residential accommodation for students or pupils
- Self-catering holiday accommodation
- Caravans used a place of permanent habitation
- Houseboats which are places of permanent habitation and which have no means of self-propulsion, or other boats which are used as an individual’s sole of main residence on which the owner pays Council Tax or domestic rates.
Please note, that the reduced rate of VAT cannot be applied to the installation of energy-saving materials in hospitals, prisons or similar institutions, hotels, inns or similar establishments.
The installation of energy-efficient products which are not eligible for the reduced rate include: secondary or double glazing, low-emissivity glass, energy-efficient fridge freezers or condensing boilers. An exception to this would be if the installation of an energy-efficient boiler is grant-funded (please see below).
Installing energy-saving materials with other works
When energy-saving materials are installed, it is common that other goods and services will be provided at the same time. The installation of the energy-saving materials will be reduced rate but the VAT liability of the additional works may vary. Listed below are a few examples of different scenarios and the relevant VAT guidance:
Installation of energy-saving materials with ancillary supplies
Installations of energy-saving materials with ancillary supplies are eligible for reduced VAT rates. An ancillary supply is the supply of goods or services that improve the means of enjoying the principal supply eg. when installing loft insulation, a new loft hatch in the ceiling is required to be cut allowing for better access to the loft- as the cutting of the loft hatch has been carried out solely in support of the loft insulation, this service is ancillary and therefore reduced rate.
Installation of energy-saving materials with other goods and services
Occasionally, when individual goods and services are provided together, there is no single dominant supply. Therefore, the individual goods and services supplied together have equal importance and often take the form of something else. Eg- a conventional boiler, radiators, copper pipe, radiator valves, and heating controls all supplied together form a singly supply of a central heating system. Although some of the components within this central heating system may be reduced rate when supplied on their own, when they become part of a wider supply of a heating system which is not included on the list of energy-saving materials, the whole supply will be standard-rated VAT.
If you are contracted to undertake more than one job at the same premises, the VAT liability will depend upon the individual circumstances. Eg. if you are contracted to build an extension and, as part of the same contract, you are required to fit thermostatic valves to all of the property’s radiators, then this is a single standard rated supply of construction services. However, if you have a contract for an extension build and then, sometime after this work has commenced, the homeowner separately asks you to install thermostatic valves, then the latter is a separate supply and reduced rate.
Installations at new dwellings
If you install energy-saving materials as part of the construction of a new dwelling, your supply will be zero-rated. To find out more about the being involved with new builds, please refer to Notice 708: Buildings and Construction.
Grant-funded installations of heating equipment and security goods
Certain heating appliances, central heating systems, and renewable source heating systems may be eligible for the reduced VAT rate if they are grant-funded installs in the sole or main residence of a qualifying person. The reduced rate is available for supplies made under a grant scheme that has an objective of funding the installation of energy efficient measures in the homes of less well-off people.
The details are listed below:
- If you install an oil fired boiler which is grant-funded, it will be at the reduced rate. Other heating appliances for which the reduced rate is applicable, when installed with grant-funding, include: closed solid fuel fire cassettes, electric dual immersion water heaters with factory-insulated hot water tanks, electric storage heaters, gas-fired boilers, gas room heaters with thermostatic controls, and radiators.
- Regarding central heating systems which are eligible for grant-funding, the reduced rate applies to the installation, repair and maintenance of the boiler, radiators, pipework and controls forming the heating system. Grant-funded repairs and replacements of this equipment will be included for the reduced rate whether or not the original system was installed under a grant-funded scheme.
- Grant-funded installations, repairs and maintenance of renewable source heating systems will also be eligible for the reduced rate of 5% VAT.
- If a qualifying person has been disconnected from the mains gas supply and the reconnection has been paid for under a grant scheme, the reconnection is eligible for the reduced rate.
It’s important to note that if you supply heating equipment without installing it, then your supply is standard-rated even if the equipment is grant-funded. Also, the grant-funded scheme relating to security goods linked to the installation of energy-saving materials or central heating systems has now been withdrawn.
If a leasing arrangement is used to help fund the installation of a central heating system, the installer will fit the central heating system, selling the boiler and radiators to a leasing company which is supplied at standard-rate. The leasing company (who own the goods) will make an annual lease charge to the qualifying person that will be paid for by grant-funding and this supply will be taxed at the reduced rate.
Qualifying persons to receive grant-funding for any of the above will either be aged 60 years or above, or receive one or more of the following benefits:
- Child tax credit (other than the family element)
- Council tax benefit
- Disability living allowance
- Disablement pension
- Housing benefit
- Income-based job seeker’s allowance
- Income support
- War disablement pension
- Working tax credit
The reduced rate can only be applied to work that is grant-funded. If a grant does not cover the full cost of the work required to install a heating appliance or heating system, the householders may be asked to make their own contributions. Installations paid for by the householder’s contributions are not covered by the reduced rate of VAT so you will need to charge accordingly.
Alternatively, contributions from additional grants or local authority hardship funds may support the original grant scheme funding. Installations that are paid for by other supplementary grants may also be covered by 5% VAT, as long as the all of the relevant conditions have been met.
Should VAT be reclaimed or deducted before payment?
It will be down to the installer to work out the correct rate of VAT that is applicable for each of your jobs. When purchasing a product from a merchant, you will pay the standard rate of VAT at 20%. If you are completing a job that is eligible for reduced rate VAT, you can charge your customer 5% VAT. You will then be able to claim back the difference (15%) when you submit your VAT returns. For further details about charging VAT, please click here.
To read the Government’s VAT Notice 708/6: energy-saving materials in full, please click here.