THE UK is "going beyond EU directives" in offering reduced VAT on the supply and installation of energy-saving materials, according to the European Commission.
As such, the commission has referred the UK to the European Court of Justice.
Under EU VAT rules, member states may apply reduced VAT rates to the supply of goods and services used in the housing sector, as long as it is part of a social policy. However, by allowing a reduced VAT rate on all energy saving materials, the UK is going beyond the scope of what is permitted under EU law, the commission said.
All member states originally voted on a list of goods and services that could benefit from a reduced VAT rate, and insisted the list be "strictly applied", with "no room for manoeuvre or interpretation", the EU said.
While the UK could argue the reduced VAT rate is linked to its Green Deal programme to improve the energy efficiency of buildings, the Commission rejected the suggestion, stating "studies have shown that reduced VAT rates are often not the best way to achieve policy objectives or change consumer choices".
PwC partner and head of the UK firm's environmental taxes practice Jonathan Main said a decision would be many months - if not years - away should the UK continue to defend its stance.
"If we assume that the UK Government continues to defend the reduced rate, then we are unlikely to see a change in VAT rates within the next 18-24 months, which is the time it will take for the European Court to reach a decision, so we need to see this announcement in its proper context," he said.
"However, if the European Court were to force an increase VAT rate from 5% to 20% on a range of energy saving materials, this would be bad news for consumers, who would have to pay more to make their houses more energy efficient. It would also be bad news for the drive to make the UK's fuel hungry housing stock more energy efficient."
A court date has yet to be set.
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