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HMRC internal manual

VAT Energy-Saving Materials and Grant-Funded Heating Supplies

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HM Revenue & Customs
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History of the reduced rate

Introduction of the relief in 1998

The VAT (Reduced Rate) Order 1998 (Statutory Instrument 1998/1375) introduced a reduced rate of 5% VAT for the grant-funded installation - in the homes of less well-off people (those on certain specific benefits) - of the following energy-saving materials:

  • insulation for walls, floors, ceilings, roofs, lofts, water tanks, pipes and other plumbing fittings;
  • draught stripping for windows and doors;
  • central heating system controls; and
  • hot water system controls.

This relief applied to supplies made on and after 1 July 1998. The effect of the order was to add new provisions to the then Reduced Rate Schedule, Schedule A1 to the VAT Act 1994. This was done to make the grant-funding go further, allowing more vulnerable households to benefit.

The relief covered all the supplies made under the Government’s Home Energy Efficiency Scheme (HEES) (known as the Warm Front Scheme since 2000), to the extent that the installation was paid for by grant-funding. 

Extension of relief in 2000

Installation of energy-saving materials in all homes

There was also a case for reducing VAT on other energy-saving products. As domestic consumers paid 5% VAT on domestic fuel and power, there was therefore a disincentive to improve energy efficiency if VAT on energy-saving products remained at the then standard rate of 17.5%. Consequently, with effect from 1 April 2000, the scope of the reduced rate was extended to the supply and installation in all residential accommodation or charity buildings - whether grant-funded or not - of the following energy-saving materials:

  • insulation for walls, floors, ceilings, roofs, lofts, water tanks, pipes and other plumbing fittings;
  • draught stripping for windows and doors;
  • central heating system controls;
  • hot water system controls;
  • solar panels;

Since that time, the following energy saving materials have been subject to the reduced rate from the following dates:

Materials Dates
   
wind and water turbines 28 July 2000
ground source heat pumps 1 June 2004
air source heat pumps 7 April 2005
micro combined heat and power units 7 April 2005
wood-fuelled boilers 1 January 2006

Grant-funded installation of heating systems measures and qualifying security goods

In order to reflect the 2000 extension of the HEES, the relief was extended to the grant- funded installations of the following heating system measures:

  • gas room heaters with thermostatic control;
  • electric storage heaters;
  • closed solid fuel fire cassettes;
  • electric dual immersion water heaters with foam-insulated water tanks;
  • gas-fired boilers;
  • oil-fired boilers; and radiators.

Also, under a Home Office scheme linked to the HEES, the grant-funded installation of the following qualifying security goods was also included in the relief:

  • locks and bolts for windows;
  • locks, bolts and security chain for doors;
  • spy hole; and
  • smoke alarms.

This Home Office scheme has since been withdrawn.

Change to the Reduced Rate Schedule in 2001

Schedule A1 to the VAT Act 1994 was re-enacted as Schedule 7A to the VAT Act 1994 with effect from 1 November 2001. The scope of the reduced rates for installations of energy- saving materials and grant-funded installations of heating equipment were not affected.

Further extension of relief in 2002

In 2002 the relief was further extended to the grant-funded installations of factory-insulated hot water tanks, micro combined heat and power systems, and renewable source heating systems. This was done to reflect the 2002 extension of the Warm Front Scheme to such products.

The reduced rate was extended to these items with effect from 1 June 2002.

Scope of relief restricted in 2013

As from 1 August 2013, the relief was withdrawn for installation of energy saving materials in accommodation or buildings used for a relevant charitable purpose.

The European Commission (“EC”) considered that the UK’s application of the reduced rate for the installation of ESM exceeded the possibilities offered to Member States by Category (10) of Annex III to, the Principal VAT Directive (“Category (10)”). Category (10) refers to the ‘provision, construction, renovation and alteration of housing, as part of a social policy’.

In the EC’s view, the UK unlawfully applied the reduced rate since ESM are not listed in Category (10) and, even if they were, the UK has applied a reduced rate to their installation as part of an environmental, not a social policy. In addition, buildings intended solely for a relevant charitable purpose are not, in any case, housing as referred to in Category (10). The UK Government disagrees with the EC’s first two points but accepted its final point, namely that charitable non-business buildings and village halls cannot properly be described as housing.

Although the EC takes the view that the UK’s entire application of the ESM reduced rate is ultra vires, the UK government considers that it is only the application to buildings intended for use solely for a relevant charitable purpose that is in breach of European law. As such, UK law was amended to restrict this reduced rate to supplies of services of installing ESM in residential accommodation by removing the references to buildings intended for use solely for a relevant charitable purpose.