VENSAV2060 - History of the reduced rate: 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As from 1 August 2013, the relief was withdrawn for installation of energy-saving materials in accommodation or buildings used for a relevant charitable purpose.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 energy-saving materials 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 as energy-saving materials are not listed in Category (10) and, even if they were, the UK had 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 were not, in any case, housing as referred to in Category (10).

The UK accepted that the reduced rate should no longer apply to buildings intended for use solely for relevant charitable purposes and amended the UK legislation. However, it disagreed with the EC view that the UK’s entire application of the energy-saving materials reduced rate was ultra vires. The case was heard by the CJEU in case C-161/14, which held that aspects of the UK legislation were ultra-vires to the extent that supplies of installing energy-saving materials in residential accommodation:

• could not be justified as part of a social policy for the purposes of Category 10;
• fell outside the scope of the renovation and repairing of private dwellings under Category 10a; and
• included materials which accounted for a significant part of the value of the supply of the installation.

In 2015-16 the government consulted on potential changes to the UK legislation to comply with the CJEU judgment. This included the full removal of the reduced rate for the installation of solar panels, wind turbines and water turbines. It also included the requirement to apportion VAT charged on installations when the cost of the materials exceeded 50% of the total charge to the customer (in which case only the service element of the installation would benefit from the reduced rate). However, these changes met with strong opposition from the industry and the government entered into further discussions with the European Commission.