Energy-saving materials and heating equipment (VAT Notice 708/6)

How to account for VAT if you’re a contractor or subcontractor installing energy-saving materials and grant-funded heating equipment.


This notice cancels and replaces Notice 708/6 (August 2006).

1. Overview

1.1 This notice

This notice explains when the installation of energy-saving materials and heating equipment is reduced rated.

Information on the liability of other building work is explained in Notice 708: buildings and construction and Reliefs from VAT for disabled and older people (Notice 701/7).

1.2 Who should read this notice

You should read this notice if you’re a contractor or subcontractor installing:

  • energy-saving materials
  • grant-funded heating equipment

1.3 The changes

Paragraph 2.1 has been amended and paragraph 2.17 deleted to reflect that from 1 August 2013 the reduced rate no longer applies to installation of energy-saving materials in buildings used solely for a relevant charitable purpose.

1.4 The law

The VAT Act 1994, section 29A (as inserted by the Finance Act 2001) holds that goods and services specified in Schedule 7A to the Act are reduced rated.

Schedule 7A, Group 2 specifies when installations of energy-saving materials are reduced-rated.

Schedule 7A, Group 3 specifies when grant-funded installations of heating equipment and security goods are reduced rated.

You can find more information about current rates of VAT in VAT guide (Notice 700).

2. Installations of energy-saving materials

2.1 Reduced-rated installations

The reduced rate applies to the installation of certain specified energy-saving materials (see paragraph 2.5) in, or in the curtilage of residential accommodation (see paragraph 2.16).

The reduced rate applies whether or not the installation is grant funded and includes the price of the goods themselves.

If you supply energy-saving materials without installing them, your supply is standard-rated.

2.2 Installation

Installation, in this context, means putting in place energy-saving materials.

This involves some process by which materials are permanently fixed in place, although loft insulation may simply need to be unrolled and positioned in place to be installed.

2.3 Energy-saving materials installed with other works

Although the installation of energy savings materials is reduced-rated, it’s normal for other goods and services to be provided at the same time. The following gives general guidance with examples of the VAT liability of these works which should help identify the correct VAT treatment. Please note that these examples may not apply if the contractual position between you and your customer is different or if there are other supplies or activities taking place at the same time.

2.3.1 Installation of energy-saving materials only

The installation of just energy-saving materials is reduced-rated, for example, visiting a home owner solely to install cavity wall insulation or to draught strip all the windows and doors.

2.3.2 Installation of energy-saving materials with ancillary supplies

The installation of just energy-saving materials with ancillary supplies is reduced-rated. An ancillary supply is a supply of goods or services that is a better means of enjoying the principal supply, for example, installing loft insulation but having to cut a new loft hatch in the ceiling and making good to access the loft. Clearly, the cutting of the loft hatch and making good is, in itself, a simple construction supply, but as the services have been carried out solely in support of the loft insulation, they become ancillary.

However, if you replace your existing roof with a new insulated one, the insulation clearly is a better way of enjoying the new roof and so the insulation is ancillary to the new roof. As the roof is standard-rated, this applies to the whole job including the insulation.

2.3.3 Installation of energy-saving materials with other goods and services

Sometimes when individual goods and services are provided together, there is not a single dominant supply and so the individual goods and services supplied together have equal importance, often taking the form of something else. For example, a central heating system may consist of a conventional boiler, radiators, copper pipe, radiator valves, heating controls and so on. Supplied together, they form a single supply of a central heating system.

While some components of the central heating system may be reduced rated if supplied on their own, here they’re part of a wider supply of a central heating system and since a whole central heating system is not included in the list of energy saving materials eligible for the reduced rate (see paragraph 2.5) the whole supply is standard rated.

A further example would be the construction of an extension of a house. While the walls and roof space would be insulated, this is just one part of the construction of the whole extension and since there’s no reduced rate for the construction of an extension, the supply is standard rated.

However, the installation of central heating systems may still be subject to the reduced rate if grant funded - see paragraph 3.3.

2.3.4 Mixed supplies

Where you’re undertaking more than one job at the same premises, the VAT liability will depend upon the circumstances. For example, if you’re contracted to build an extension and, as part of the same contract, required to fit thermostatic valves to all the radiators in the house, then this is a single standard-rated supply of construction services.

However, if you have a contract to building an extension and some time after the work has commenced, the homeowner separately asks you to install thermostatic valves, this is then a separate supply and reduced-rated.

2.4 New dwellings

If you install energy-saving materials during the course of construction of a new dwelling, your supply is zero-rated. If you’re involved in the construction of new dwellings you should consult Notice 708: buildings and construction.

2.5 Energy-saving materials covered by the reduced rate

The reduced rate applies to the installation of:

2.6 Controls for central heating and hot water systems

Central heating and hot water system controls include manual or electronic timers, thermostats, mechanical or electronic valves, including thermostatic radiator valves.

2.7 Draught stripping

Draught stripping products are strips that are fixed around windows, interior and exterior doors, and loft hatches to reduce draughts.

2.8 Insulation

Insulation means materials that are designed and installed because of their insulating qualities.

The reduced rate applies to installations of insulation for:

  • walls
  • floors
  • ceilings
  • roofs or lofts
  • water tanks, pipes or other plumbing fittings

The reduced rate does not apply to products such as curtains and carpets which are not usually installed simply as insulation.

2.9 Solar panels

Solar panels include all systems that are installed in, or on the site of, a building and that are:

  • solar collectors such as evacuated tube or flat plate systems, together with associated pipework and equipment, such as circulation systems, pump, storage cylinder, control panel and heat exchanger
  • photovoltaic (PV) panels with cabling, control panel and AC/DC inverter

2.10 Wind turbines

The reduced rate covers the installation of all equipment essential to the operation of wind turbines, including mounting poles, electrical cables, battery banks and voltage controllers.

2.11 Water turbines

The reduced rate covers the installation of all equipment essential to the operation of water turbines, including electrical cables, battery banks and voltage controllers.

2.12 Ground source heat pumps

These transfer energy from the natural heat stored in the earth to heat the home and domestic hot water. They can also be used to augment existing heating systems in the same way as solar panels.

2.13 Air source heat pumps

These use the air as a source of heat. Some air source heat pumps can be reversed so that they draw heat from inside a building, thus providing cooling during the summer as well as indoor heating for colder periods of the year.

2.14 Micro combined heat and power units

These produce heat and hot water but, in addition, they also generate electricity.

2.15 Wood-fuelled boilers

The reduced rate covers the installation of boilers designed to be fuelled solely by wood (including wood chips and pellets), straw or similar vegetal matter. Some boilers need hoppers to feed the fuel into the boiler. Where a hopper is integral to the installation of the boiler it’s included within the scope of the reduced rate.

The reduced rate does not apply to installations of ‘multi-fuel’ or ‘dual-fuel’ boilers which are designed to burn other non-renewable fuels such as coal or oil as well as wood, nor does it cover stand-alone wood-burning stoves. The construction or conversion of buildings or extensions for use as log or fuel stores also falls outside the scope of this reduced rate.

2.16 Residential accommodation

The installation of energy-saving materials is only reduced rated if they’re for use in 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 people, or people who suffer or have suffered from drug or alcohol dependency or mental disorder
  • hospices
  • institutions that are the sole or main residence of at least 90% of their residents
  • monasteries, nunneries and similar religious communities
  • residential accommodation for students or pupils
  • self catering holiday accommodation
  • caravans used as a place of permanent habitation (such as a park home or static caravans sited on a permanent residential caravan park)
  • houseboats that are designed or adapted for permanent habitation and have no means of self propulsion, or other boats which are used as a person’s sole or main residence, such as canal boats and Dutch barges, on which the boat owner pays Council Tax or domestic rates

The reduced rate does not apply to the installation of energy-saving materials in hospitals, prisons or similar institutions, hotels or inns or similar establishments.

2.17 Other energy-efficient products

The reduced rate only applies to the installation of the energy-saving materials listed at paragraph 2.5.

The reduced rate does not apply to the installation of other energy-efficient products, such as energy-efficient boilers (but see section 3 if the installation is grant funded), secondary or double glazing, low-emissivity glass, or energy-efficient fridge freezers.

3. Grant-funded installations of heating equipment and security goods

3.1 Reduced-rated installations

The reduced rate applies to the grant-funded installation of certain heating appliances, central heating and renewable source systems in the sole or main residence of a qualifying person (see paragraph 3.8).

This includes the price of the equipment itself.

The reduced rate only applies to the extent that the supply is grant funded (see paragraph 3.9).

If you supply heating equipment without installing them your supply is standard-rated, even if it’s grant funded.

3.2 Heating appliances

The reduced rate applies to the installation of:

  • 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
  • oil-fired boilers
  • radiators

3.3 Central heating systems

The reduced rate applies to the installation, repair and maintenance of a boiler, radiators, pipework and controls forming a central heating system.

This includes micro combined heat and power systems, which are heating systems that also generate electricity.

The reduced rate includes repairs and replacements of such equipment, whether or not the original system was installed under a relevant grant-funded scheme.

3.4 Renewable source heating systems

The reduced rate applies to the installation, repair and maintenance of renewable source heating systems.

This means space or water heating systems which use energy from:

  • renewable sources, including solar, wind and hydroelectric power
  • near renewable sources, including ground and air heat

3.5 Security goods

The grant-funded scheme relating to security goods linked to the installation of energy-saving materials or central heating systems has now been withdrawn.

3.6 Connection or reconnection to the mains gas supply

Where a qualifying person has been disconnected from the mains and re-connection is paid for under a grant scheme, that reconnection is eligible for the reduced rate.

3.7 Leasing arrangements

Under some grant-funded schemes, a leasing arrangement may be used to help fund the installation of a central heating system. Where this happens, the installer will install the central heating system as usual, but they will sell the boiler and radiators to a leasing company. This supply is standard rated.

The leasing company, which will then own the goods, will make an annual lease charge to the qualifying person, which will be paid by grant funding. This supply is taxed at the reduced rate.

Where a leasing arrangement is used to help fund the installation of a central heating system there are 2 types of payment that may become due besides the lease charge:

(a) termination fee - this is payable by the qualifying person or their landlord if the qualifying person moves house during the 7-year lease period; or

(b) end of lease payment - the qualifying person must make a final payment to the lease company at the end of the lease period.

Both of these are further payments for the lease of the equipment and are eligible for the reduced rate.

3.8 A qualifying person

A qualifying person is a person who receives a grant for the installation of heating appliances (paragraph 3.2) or for the installation, maintenance or repair of a central heating system (paragraph 3.3) or for a renewable source heating system (paragraph 3.4) and is:

(a) aged 60 or over, or

(b) receives 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 Jobseeker’s Allowance
  • income support
  • war disablement pension
  • Working Tax Credit

If there are 2 or more people living in a dwelling, and one person is a qualifying person and the other residents are not, the reduced rate will apply if the supply is to the qualifying person, and they’re eligible for the grant. In practice, for a supply to be to a qualifying person, that person will have to be responsible for ordering the work to be done.

3.9 Grant-funded schemes

The reduced rate is only available for supplies made under a grant scheme that has an objective of funding the installation of energy-efficiency measures in the homes of less well-off people.

There will usually be no need to look at the formal basis of the grant scheme concerned.

In practice, the explanatory material issued by those who organise schemes will usually make it clear what they will pay for.

If the material published by or about a scheme makes it clear that it funds the installation of energy-savings materials and so on, and it actually operates in line with those commitments, then the scheme can be treated as having the above objective.

3.10 Grants covering more than the installation of heating equipment

Grant-funding bodies may make awards to fund the combined cost of the installation of central heating systems, or heating appliances, and other building work, requiring the householder to pay the balance.

If you carry out other work, such as building repairs or maintenance, at the same time, that element of the work isn’t covered by the reduced rate.

You must make a fair and reasonable apportionment of the charge made.

3.11 Contributions from householders’ own resources

The reduced rate only applies to work that’s grant funded.

Where installation of central heating systems or heating appliances takes place in a house and the grant does not cover the full cost of the work, householders will make their own contributions.

The installations paid for by these contributions are not covered by the reduced rate. Where you do work that’s paid for like this, you need to apportion your charge accordingly.

3.12 Contributions from other sources

In addition to grants from the main grant-awarding bodies, and contributions from householders own resources, additional grants or contributions may be made by others.

This extra help may come, for example, from local authority hardship funds.

Installations paid for by other supplementary grants or contributions may also come within the scope of the reduced rate, if they meet all the conditions.

Installations paid for by contributions from landlords do not qualify for the reduced rate.

Your rights and obligations

Read Your Charter to find out what you can expect from HM Revenue and Customs and what we expect from you.

Help us improve this notice

If you have any feedback about this notice please email:

You’ll need to include the full title of this notice. Do not include any personal or financial information like your VAT number.

If you need general help with this notice or have another VAT question you should phone our VAT Helpline or make a VAT enquiry online.

Putting things right

If you are unhappy with HM Revenue and Customs (HMRC) service, contact the person or office you’ve been dealing with and they’ll try to put things right.

If you are still unhappy, find out how to complain to HMRC.

How HMRC uses your information

Find out how HMRC uses the information we hold about you.

Published 17 July 2014