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This publication is available at https://www.gov.uk/government/publications/vat-changes-to-the-reduced-rate-for-energy-saving-materials-2019/vat-changes-to-the-reduced-rate-for-energy-saving-materials-2019
Who is likely to be affected
Businesses that provide and install energy-saving materials (ESMs) and customers who have the ESMs installed.
General description of the measure
A reduced rate of 5% VAT applies to the installation of certain ESMs in residential accommodation. This measure amends the scope of the reduced rate as set out below.
- The withdrawal of the reduced rate for the installation of wind turbines and water turbines.
- Limiting the reduced rate to the labour cost element of a supply of installation where the value of the materials exceeds 60% of the total cost charged to the customer. However, this restriction will not apply where the customer satisfies certain conditions (is aged 60 or over or is in receipt of certain benefits), the supply is to a relevant housing association or the building in which the ESMs are installed is used solely for a relevant residential purpose.
In all other respects, the relief is retained in full.
This measure provides certainty and ensures that the reduced rate relief for supplies of installations of ESMs is drawn as widely as possible, consistent with the requirements of existing legislation governing the application of VAT in the EU.
Background to the measure
The UK is required to follow the judgement of the CJEU (Case C-161/14), which narrows the scope of the reduced rate.
A consultation document was published on 9 December 2015, together with the proposed draft legislation. There was a further consultation on the revised draft legislation, which was published on 8 April 2019.
The measure will affect installations of affected ESMs from 1 October 2019.
Group 2 of Schedule 7A to the VAT Act 1994 (‘Group 2’) permits the reduced rate of VAT to apply to the installation of ESMs in residential accommodation and the supply of the ESMs installed by the person installing them. Sections 29A (4) and 96(9) of the VAT Act 1994 provide power for the Treasury to make an order to amend Schedule 7A.
Legislation will be introduced by statutory instrument to amend Group 2 as set out below.
- The reduced rate of 5% will no longer apply to the installation of wind and water turbines.
- The reduced rate will remain fully available (except on wind and water turbines) for supplies of services of installing ESMs in residential accommodation where the supply is made to a qualifying person (a person who is aged 60 or over or is in receipt of certain benefits), a relevant housing association or where the residential accommodation is a building or part of a building used solely for a relevant residential purpose.
- Otherwise, the reduced rate will be available (except on wind and water turbines) provided that the value of the ESMs does not exceed 60% of the total value of the supply of installing the ESMs. If the value of the ESMs exceeds 60%, then only the labour cost element will qualify for the reduced rate (with the supply of the materials being standard rated).
The legislation also confirms that supplies that have been paid for before the operative date, or supplies made under contracts entered into prior to that date, are unaffected by these changes.
Summary of impacts
Exchequer impact (£m)
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This measure is expected to have a negligible impact on the Exchequer.
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
There will be an increased cost for a small number of individuals who will have to pay the standard rate of VAT for the installation of a wind or water turbine or on the goods element of an installation of ESMs rather than the reduced rate of 5%, although the impact is anticipated to be negligible.
The measure is not expected to impact on family formation, stability or breakdown.
With the exception of the relief for wind and water turbines which is withdrawn, the relief will continue to apply to supplies of installations of ESMs to individuals aged 60 years or over where the accommodation in which the ESMs is installed is their sole or main residence. Supplies of installations of ESMs to individuals under 60 years of age may be impacted if the value of the ESMs installed exceeds 60% of the total cost of the installation.
It is not anticipated that the measure will impact on any other group with protected characteristics.
Impact on business including civil society organisations
This measure is expected to impact on businesses which supply and install ESMs. These businesses will now have to apply the standard rate of VAT to the supply and installation of wind and water turbines in residential homes and may have to apply it to the goods element of a supply of ESMs.
One-off costs are expected to include familiarisation with the new rules and changing systems to account for VAT at 20% on supplies that do not qualify for the reduced rate. Ongoing costs include performing calculations to determine whether the reduced rate applies and / or ascertaining whether customers are eligible for the reduced rate on supplies made to them.
For most supplies, other than in a small minority of more complex or borderline cases, this will be straightforward once systems are changed to accommodate it. Overall, the measure is expected to have a negligible impact on administrative burdens of business including civil society organisations.
Operational impact (£m) (HMRC or other)
HMRC will incur negligible costs implementing this change. Guidance on the changes will be published in August 2019.
It is anticipated these changes will have a negligible environmental impact.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
If you have any questions about this change, please contact Patrick Wilson on telephone: 03000 585 571 or email: firstname.lastname@example.org.