Policy paper

The Value Added Tax (Installation of Energy-Saving Materials) Order 2023

Published 29 March 2023

Who is likely to be affected

Businesses that provide and install energy-saving materials (ESMs) and customers who have the ESMs installed in Northern Ireland.

General description of the measure

The Windsor Framework enables this measure, which extends the time-limited zero rate of VAT for the installation of certain types of ESMs to Northern Ireland.

In line with the rest of the UK, the zero rate that was announced at Spring Statement 2022 will be available on the same basis in Northern Ireland until 31 March 2027 and will then revert to the 5% reduced rate of VAT (unless the government introduces further legislation to extend this period).

Policy objective

The policy objective is to incentivise the installation of ESMs in people’s homes across the whole of the UK.

Background to the measure

At Spring Statement 2022, the government announced that a temporary zero rate would be introduced in Great Britain with effect from 1 April 2022. This measure extends this temporary zero rate to Northern Ireland with effect from 1 May 2023.

Consistent with the changes introduced in Great Britain, it also:

• widens the scope of the relief to include wind and water turbines
• simplifies the legislation by removing certain eligibility criteria

This will incentivise the take-up of ESMs across the whole of the UK in line with the government’s net zero objectives.

Detailed proposal

Operative date

The measure will take effect from 1 May 2023.

Current law

Group 2 of Schedule 7A to the Value Added Tax Act 1994 (VATA) (‘Group 2’) provides for the reduced rate of VAT to apply to the installation of ESMs in residential accommodation in Northern Ireland, in certain circumstances.

These are when either the:

• “social policy conditions” are satisfied, meaning the supplies go to:
  • persons aged 60 or over, or in receipt of certain benefits
  • housing associations or installations in accommodation, and are used solely for a relevant residential purpose
• cost of the ESM does not exceed 60% of the total value of the supply (“the 60% test”) — if the cost of the ESM is more than 60%, only the labour cost element qualifies for the reduced rate (with the materials standard rated)

Sections 29A(3) and 96(9) of VATA provide power for HM Treasury to make an order to amend Schedule 7A. Sections 30(4) and 96 (9) provide power for HM Treasury to make an order to amend Schedule 8.

Proposed revisions

The changes will reverse the 2019 legislative changes and widen the scope of the relief to align with the rest of the UK, set out as follows for installations of ESMs in Northern Ireland:

• 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
• a temporary reduced rate will be introduced with effect from 1 May 2023 until 31 March 2027
• unless the government introduces further legislation to extend the period of the zero rate, the installation of ESMs will revert back to the 5% reduced rate from 1 April 2027

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
—	Negligible	Negligible	Negligible	Negligible	Negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will positively impact individuals through lower prices charged by ESM installers, subject to the degree to which these businesses pass the VAT savings on to their customers.

There is expected to be no impact on family formulation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a positive impact on businesses in Northern Ireland that make supplies of installations of ESMs in residential properties, and individuals and organisations in Northern Ireland that purchase them.

The changes will benefit businesses that install ESMs as they will no longer need to consider the social policy conditions, or perform calculations to determine if the installation qualifies for the relief.

For a time-limited period, they will also no longer be required to charge VAT, but will still be able to recover input tax in relation to these supplies. As long as this VAT saving is passed on to consumers, it should boost demand for the installation of ESMs.

One off costs include familiarisation with the change and are expected to be negligible. There are not expected to be any continuing costs.

Continuing savings are expected to be significant and could include businesses:

• no longer needing to assess the proportion of materials provided
• having a single rate apply to all supplies

This measure is not expected to impact civil society organisations.

Customer experience is expected to remain broadly the same as it does not alter how businesses or civil society organisations interact with HMRC.

Operational impact (£m) (HMRC or other)

HMRC may initially incur increased costs administering the new rules . Guidance on the changes will be published shortly.

Other impacts

The measure is intended to encourage greater take-up of ESMs and is therefore expected to contribute to the government’s net zero targets in a positive way.

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.

Further advice

If you have any questions about this change, email: phil.hurst@hmrc.gov.uk or patrick.wilson@hmrc.gov.uk

Declaration

Victoria Atkins MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.