VAT and Energy Saving materials

As part of the Spring Budget, the Chancellor made a number of changes to the VAT treatment of Energy Saving Materials (ESMs). As the UK has now left the EU it has the freedom to change the VAT rules applying in England, Wales and Scotland (“Great Britain”) however, because of the special status of Northern Ireland under the EU Exit arrangements, the ESM rules in Northern Ireland have not changed.

This article focuses on the rules in England, Wales and Scotland.

In broad terms, the changes are:

1. In Great Britain, the “Social Policy” conditions and the 60% test that previously restricted the application of the reduced VAT rate on the installation of ESMs were removed.
2. From 1 April 2022 until 31 March 2027 the installation of ESMs in, or in the curtilage of, residential accommodation in Great Britain will qualify for the zero rates of VAT. From 1 April 2027 the reduced VAT rate, which is currently 5%, will apply.
   
3. The type of ESM eligible for the reduced rate when installed includes insulation, solar panels, ground heat pumps, air-source heat pumps and wood-fired boilers. In Great Britain, this has been extended to include wind and water turbines.
   

The reduced or zero rates of VAT will not apply to supplies of materials only without any installation. Installation means the ESM has to be put in place, in general, this would require permanent fitting although loft insulation can simply be unrolled and positioned in place.

Residential accommodation includes houses, blocks of flats but also homes providing care for the elderly, hospices, student accommodation, self-catering holiday accommodations and caravans used as a permanent residence.

Installation of ESMs in the non-residential building is subject to VAT at 20%.

There has been no change to the reduced rate for grant-funded installation of heating equipment. These qualify for the reduced rate when supplied to a person who is over 60 or in receipt of certain benefits and installed in the sole or main residence.

This measure will provide some assistance in moving to greener energy sources in Great Britain at least. As always there are complexities especially if ESM is being installed as part of a larger project.

If you would like advice regarding this change, please contact us.