European Commission Rules against reduced VAT on Energy Saving Materials

The European Commission has judged that the UK has failed to comply with the VAT Directive (Directive 2006/112/EC) by applying a reduced rate of 5% to the supply and installation of energy materials for residential housing, which includes biomass boilers and solar panels. The Commission brought infringement proceedings against the UK before the Court of Justice.

The decision arises as EU law only permits a reduced rate of VAT to social housing. The judgement means that VAT on energy-saving materials will now have to be charged at the UK standard rate (currently 20%). This decision will impact homeowners or businesses that own residential property such as farms and estates.

The UK did make an attempt to comply with the EU law in 2013, when the Finance Bill withdrew the right to apply VAT relief in relation to charitable buildings but stated ‘it will continue to apply in the case of residential accommodation’, however clearly this did not go far enough. The Commission states that under the VAT Directive, a reduced rate of VAT cannot be applied where the materials account for a significant part of the value of the service applied. Therefore, previous HMRC guidance that reduced rate VAT would apply to a single contract where the materials and the installation costs were included, was also not in line with the EU VAT Directive.

The UK may have to find a more efficient way of promoting energy efficient materials whilst remaining in line with EU VAT law, however without addressing such issues this will undoubtedly impact residential property owners with a significant rise in costs. There has been no comment from HMRC when UK law will be changed but we will provide an update as soon as we are notified.