The Finance Bill 2016 had a notable absence of changes to the reduced rate of VAT for energy saving materials (“ESMs”).
EU legislation permits the UK to have two different reduced rates for VAT. In relation to ESMs, the reduced rate is to be used for the “provision, construction, renovation and alteration of housing, as part of social policy” and for the “renovation and repairing of private dwellings”.
In December 2015, the Government announced its plans to amend the rules relating to the 5% reduced rate applied to ESM’s following a Court of Justice of the European Union (“CJEU”) ruling that the UK had applied the reduced rate too widely.
The Government consulted on the following proposals:
- A reduced rate to continue to apply to all supplies made to people living in dwellings with a social need (persons aged over 60 or in receipt of benefits), a relevant housing association or where a building is used for a relevant residential purpose such as care homes.
- For non-qualifying persons, the full relief to only apply where the cost of materials installed was lower than the cost of labour to install them. If the cost of the ESMs was greater, then the reduced rate would only apply to the labour cost and the materials would be subject to the standard 20% rate.
- The list of eligible ESMs to exclude solar panels, water turbines and wind turbines.
It had it been planned for these changes to take effect on 1 August 2016. However the Government are not proceeding with any changes to VAT on ESMs in the current Finance Bill.
It has been suggested that the European Commission have indicated a willingness to agree with the UK’s arguments for more flexible VAT rates – this is why the Government does not deem it necessary to make the changes in wake of the CJEU ruling – for now.
The decision to stall reduced VAT rates will be welcomed by those in the renewable energy sector, although it remains to be seen whether a deal is struck with the European Commission negating a change to rates altogether. Of course, the effect of Brexit may see the wind change in yet another direction.
This article was written by Inderpreet Heire.