VQOTW: Energy Saving Materials

My client is planning major renovations to her home to make it more “eco-friendly”. This will involve the installation of a number of energy-saving materials such as solar panels, insulation, and an air source pump to provide both heating and cooling functions. However, she has heard there are imminent changes to the VAT treatment of such supplies and is concerned she may miss out on current VAT reliefs. Please could you clarify?

Currently, the installation of certain energy saving materials in any residential accommodation is subject to the reduced VAT rate of 5%. Details of the current treatment can be found in Notice 708/6 ( https://www.gov.uk/guidance/vat-on-energy-saving-materials-and-heating-equipment-notice-7086).

In 2015 the UK was infracted by the European Commission on its application of the reduced rate of VAT on energy saving materials (ESMs) and subsequently lost its case in the European Court of Justice CJEU. The UK was required to comply with the CJEU’s judgment and amend the UK legislation that makes provision for the reduced rate for ESMs. In response HMRC published a consultation on proposed changes to the VAT treatment of ESMs. Details of this original consultation can be accessed via this link: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/483363/VAT-Changes_to_the_reduced_rate_of_VAT_for_Energy_Saving_Materials_-_consultation__M7000_.pdf

Subsequently on 8 April 2019 HMRC published revised draft legislation, which is due to take effect from 1 October 2019. Some restrictions are still proposed, but these do not go as far as the original 2015 proposals. Wind and water turbines are being removed from the list of qualifying items. Solar panels, ground and air source heat pumps, and micro heat and power units remain qualifying if the conditions outlined below are met.

Installation services on their own will remain subject to the 5% reduced rate. However installation services together with listed materials will qualify for 5% VAT in the following circumstances:

  1. the customer is over 60 or in receipt of certain benefits;
  2. the customer is a registered housing association;
  3. the building is a ‘relevant residential’ building, such as a care home.

The reduced rate will also apply to supplies made to persons living in dwellings who are not qualifying persons, but where the value of the materials exceeds 60% of the total value of supplying and installing the goods, the reduced rate will be restricted to the labour element of the supply and the materials or hardware will be standard-rated.  This is the part most likely to affect your client unless she falls into the first category outlined above.

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VAT Advice Consultant
0844 892 2470

Sally is the Team Leader of the VAT Advice and Consultancy team at Croner Taxwise. She has worked in VAT since 1990, including eight years spent with HMRC, both as an Assurance and Enquiries Officer involved in presenting seminars and business education. Since joining private practice in 1999, Sally has specialised in providing VAT technical advice to a variety of clients, ranging from small one-man bands to large multi-national corporations, on the full range of VAT technical matters.

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