VQOTW: Energy Saving Materials
My client is a VAT registered business and has been asked to install a ground source heat pump in a domestic property. The client is supplying materials (£2,000 excluding VAT) and labour (£2,000 excluding VAT. The client has been looking at HMRC’s VAT Notice 708/6 on Energy Saving Materials and is unsure if the reduced rate can be applied.

Further to the Chancellor’s Announcement on 24 March 2022 changes have been made to the VAT liability on the installation of energy saving materials which should benefit suppliers by significantly simplifying the rules and homeowners by reducing the VAT payable, assuming suppliers pass on the benefit.

The new measures see the reversal of the Court of Justice of the European Union derived legislative changes that were introduced in 2019.

A time limited zero rate of VAT for the installation of energy saving materials for a period of five years from 01 April 2022 until 31 March 2027 has been introduced. This measure permanently removes the social policy conditions and the 60% test. It also brings wind and water turbines back into the scope of the relief. It will revert to the reduced rate of 5% from 01 April 2027.

The list of qualifying goods and rate of VAT due on installations will remain unchanged for Northern Ireland.

Further information on these new changes are in this link:

https://www.gov.uk/government/publications/changes-to-the-vat-treatment-of-the-installation-of-energy-saving-materials-in-in-great-britain/the-value-added-tax-installation-of-energy-saving-materials-order-2022

Rules applying in GB to 31 March 22 and in Northern Ireland

The previous rules, which your client has been reading in Notice 708/6, and which remain in place for suppliers in Northern Ireland are explained below. The social policy conditions and 60% test are quite complicated.

Where certain specified energy saving materials are installed into domestic residential accommodation or its curtilage the reduced rate of 5% can be applied to the installation.

From 01 October 2019, the installation of energy saving materials in residential accommodation only qualify for the reduced rate where either one of the social policy conditions set out below has been satisfied or the 60% test has been met.

Social Policy Conditions

There are three social policy conditions to consider and only one condition needs to be met for the reduced rate to apply.

First condition – Where the installation takes place for a ‘qualifying person’ in their sole or main residence.

A ‘qualifying person’ is a person who is aged 60 or over or is in receipt of one 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

Second condition – Where the supply is to a relevant housing association which includes a registered social landlord and registered housing association.

Third condition – Where the supply is to a ‘relevant residential purpose’ building solely used as residential accommodation. This includes children’s homes, care homes and accommodation for the armed forces.

The 60% Test

In order to carry out the 60% test you must first establish the purchase price of all goods and materials (excluding VAT) supplied for the installation and calculate this as a percentage of the total value of the supply (excluding VAT).

As it is not clear if the homeowner meets any of the social policy conditions, I have looked at the 60% test with the figures your client has provided.

The materials were purchased for £2,000 (excluding VAT), £2,000 (excluding VAT) for the labour, total value of supply £4,000 (excluding VAT). Since the cost of the materials to the business is only 50% of the value of the supply that the business makes to its customer, the business can charge the reduced rate of 5% on the total supply, that is 5% of £4,000 = £200.

If the 60% threshold is exceeded, then the business will need to apportion the value of the supply between materials which will be standard rated (20%) and labour which will be reduced rated (5%).


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VAT Advisor
0844 892 2470


Arti has worked in VAT since 2004 spending 11 years with HMRC. During her time in the department she was a visiting officer, a business records check officer providing educational visits and spent the last three years on the Alcohol Fraud team where she gained a good understanding of civil penalties and appeals. In addition she was an IT specialist providing support to colleagues and an associate trainer delivering VAT and Penalties training.

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