VAT: changes to the reduced rate for energy saving materials
Published 9 December 2015
© Crown copyright 2015
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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/vat-changes-to-the-reduced-rate-for-energy-saving-materials
Who is likely to be affected
Businesses that provide and install energy saving materials and individuals who have them installed.
General description of the measure
This measure amends 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 following a judgement of the Court of Justice of the European Union (CJEU).
The changes:
- retain the remainder of the relief in full (subject to the second bullet point below):
- for all existing customers except where the cost of the goods installed is greater than the labour cost of installing those goods. In that situation, the labour only will be subject to the reduced rate and the goods installed will be subject to the standard rate (VAT at 20%)
- the goods installed will still be subject to the reduced rate irrespective of whether its cost is greater than the labour cost if the customer is over 60 years of age, on certain benefits, is a building used solely for a relevant residential purpose or a relevant housing associations
- withdraw the reduced rate from the installation of solar panels, wind turbines and water turbines
Policy objective
The CJEU has judged that the UK has failed to apply the reduced rate relief for supplies of energy saving materials correctly following infraction of the UK by the European Commission (EC). This change therefore seeks to retain as much of the existing relief as is possible by relying on the same and alternative vires in the European VAT Directive.
Background to the measure
The measure was announced at Autumn Statement 2015.
No formal consultation took place as the UK is required to comply with the judgement of the CJEU and this option retains as much of the relief as is possible following that judgement.
Detailed proposal
Operative date
The measure will have effect on supplies made on and after 1 August 2016.
Current law
Group 2 of Schedule 7A to the VAT Act 1994 permits the reduced rate of VAT to apply to the installation of energy saving materials in residential accommodation and the supply of those materials by the person installing them.
Legislation will be introduced in Finance Bill 2016 which amends Items 1 and 2 and inserts a new Item 3 into Group 2 of Schedule 7A of the VAT Act 1994 to deal with to whom and how the relief now applies (as explained above). In addition, Note (1)(e), (f) and (g) will be repealed (solar panels, wind turbines and water turbines) and new notes will be inserted to determine who a qualifying person is and also to determine what is a relevant housing association.
The legislation will also include the start date of 1 August 2016 and confirms that supplies that have taken place, have been paid, or contracts signed prior to that date are unaffected by these changes.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
| - | +45 | +65 | +65 | +65 | +70 |
The Office for Budget Responsibility has included these numbers in its forecast.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
The measure is likely to affect fewer than 500,000 individuals (and households) and the impact on affected individuals (and households) is anticipated to be negligible.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
The measure does not have any impact on equalities.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses and civil society organisations.
The government estimates that there are roughly 3,000 business who will incur small one-off costs updating their invoicing systems to account for the change in the tax rate on the installation of solar panels, wind turbines and water turbines. These costs are therefore expected to be negligible.
Businesses installing Energy Saving Materials where the cost of the material outweighs the cost of installation will have to spend more time ensuring they are applying the correct tax rate. However, to date this has only been identified as an issue for the installation of Micro Combined Heat and Power boilers and we estimate that there are fewer than 30 businesses affected and note that there were fewer than 30 Micro-generation Certification Scheme certified installations in 2014 to 2015.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
It is not anticipated that implementing this change will incur any additional costs or savings for HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information collected in tax returns and through communication with the affected taxpayer group.
Further advice
If you have any questions about this change, please contact John Egerton on Telephone: 03000 585703 or email: john.egerton@hmrc.gsi.gov.uk