Reduced Rating for Energy Saving Materials including Solar Panels – VAT Update

In 2015 the European Commission challenged the UK’s treatment of the installation of energy saving materials. The UK treats the supply and installation of energy saving materials to residential properties as subject to 5% VAT. This includes all the costs under a contract assuming the materials meet the tests in the legislation. Energy saving materials currently include solar panels, wind turbines, biomass boilers and ground and air source heat pumps.

The European Commission challenged the UK’s position on the basis that its scope was too wide and recommended that the legislation should be changed. Perhaps due to other pending VAT issues at the time, such as Brexit and MTD, the law was never changed.

In April 2019, HMRC announced its intention to change the law with revised draft legislation. However, the restrictions within the change in the law are not as significant as were first thought when the European Commission became involved.

Associations which represent the renewable energy industry are concerned by the change suggesting that it will put further costs on to the consumer at a time where climate change seems to be high on the UK Government’s agenda.  Also, the EU appears to be more open to softening the rules on what services can benefit from reduced rates, although it was down to European Commission pressure that this change was brought it.

What are the new rules?

The changes proposed by HMRC will come into effect from 1 October 2019.

Installation services on their own will remain subject to 5% VAT so this will not change, however where these services are provided together with the materials under the one contract, the qualifying materials will only be subject to 5% VAT in one of three situations:

1.   The customer is over 60 or in receipt of certain benefits;
2.   The customer is a registered housing association;
3.   The building in question is a care home, hall of residence, or other ‘relevant residential purposes’ building.

If the customer or building does not qualify in any of the above situations, the goods and services can still be subject to 5% VAT provided that the goods make up no more than 60% of the total charge. If they do, then 5% VAT can only apply to the services element.

Wind and water turbines which were formerly on the list as energy saving materials will be removed but solar panels, ground and air source heat pumps, micro heat and power units and biomass boilers remain on the list.

Who will the changes affect?

Registered Social Landlords such as housing associations, care home operators and schools, colleges and Universities should not be affected by the changes. Previously, 5% VAT applied to installations of energy saving materials to charitable buildings, however the law was changed some years ago. Charities will have to pay 20% VAT on all costs associated with the installation of energy savings materials so current law will not change for charities.

Other property owners undertaking energy saving works such as insulation, draught stripping and upgrading heating controls should still incur 5% VAT as these works are labour-intensive.

What next?

Homeowners who no longer qualify for this relief under the new rules might want to consider bringing forward their projects to ensure that the obtain 5% VAT on the works and materials.