UPDATED: Government to end 5% VAT rate

Published:  28 August, 2012

The government is set to withdraw the 5% reduced VAT rate for energy-saving materials installed in buildings used by charities, APHC has learned.

The government is to likely to withdraw the 5% VAT rate for energy-saving materials (ESM) such as solar thermal panels, biomass boilers and heating controls, installed in buildings used for a relevant charitable purpose, in August 2013.

The announcement comes after the European Union called for the 5% VAT rate to be scrapped altogether, as it considers the rates to be ‘beyond the scope’ of the VAT directive. The EU has since commenced infringement action against the UK on the basis that the reduced rate is not allowed in EU law, and the UK is in breach of its obligations as a member of the EU.

The government’s view is that the reduced rate for the installation of these technologies in residential accommodation is consistent with the VAT directive, and they will be defending this point. The government has, however identified that it has little option but to progress with the change to VAT rates for ESM for charitable purposes.

John Thompson, APHC chief executive, said: “It is unfortunate the government has decided to withdraw the reduced rate for ESM installed in buildings used for a charitable purpose, at this time. There is already a great deal of confusion in the industry surrounding the use of the 5% VAT rate, now we have further confusion and complication around the application of the reduced rates.

"These buildings used for charitable purposes (such as village halls) are often in a poor state of repair and any remedial or improvement works would benefit greatly from a VAT reduction. The reduced 5% rate will still be available until 1 August 2013, so I would encourage installers to ensure any claims for ESM installations or installation work are complete well before August 2013.

"We remain concerned that the government may have to change its stance on the application of a reduced rate of VAT for ESM in residential properties as part of the EU action. This has the potential to significantly impact on the current range of green initiatives applicable to dwellings.”

HM Revenue & Customs has called on installers of ESM and businesses in the construction sector who will be affected by this issue to have their say on the changes. The HMRC documents can be found online here - http://www.hmrc.gov.uk/briefs/vat/brief2612.htm.

The Heating & Hotwater Industry Council has reacted angrily to news, questioning how the plan can be consistent with David Cameron’s claim that his government will be the greenest ever.

HHIC director Roger Webb said: “If the government wants to be the greenest ever then they need to show it. Raising VAT on energy saving materials on buildings used for charitable purposes is a triple-whammy. It will stop people investing in energy efficiency measures, putting up building running costs; it will be bad for the environment, as more energy will be wasted and carbon emissions increase; it will be tougher too on the very charities that are part of the so-called Big Society, as they will have to pay 20% VAT not five.

"We urge the government not to bow to EU pressure on this and withdraw their planned changes. However, we support the government in their stance to protect 5% VAT on domestic installations and in particular energy saving measures such as controls, which would be very damaging for the industry if this was changed in the near future.”