Risk & Economy » Tax » UK told Green Deal VAT breaks are illegal

THE UK’S VAT reductions for energy saving materials installed in homes have been ruled illegal by a European Court, potentially dealing a blow to the UK’s energy efficiency ambitions, reports sister publication BusinessGreen.com.

Technologies including solar panels, wind turbines, insulation, central heating controls, and heat pumps currently attract a five per cent rate of VAT instead of the standard 20 per cent.

The European Commission ordered the UK to scrap the tax break in 2013, saying the policy does not comply with the EU’s VAT Directive and there were more “efficient” ways of promoting energy efficient materials, such as direct subsidies.

The UK Treasury signaled its intention to appeal later that year, arguing that upgrading homes not only saves emissions and boosts efficiency, but also has wider social benefits that justify the reductions.

However, on Thursday the European Court of Justice (ECJ) ruled the reduced VAT rate could only apply to transactions related to social housing and the UK will face weekly fines unless it changes the rules.

“The UK cannot apply, with respect to all housing, a reduced rate of VAT to the supply and installation of energy-saving materials, since that rate is reserved solely to transactions relating to social housing,” the ECJ said in a statement.

While the ruling will not affect those who have already ordered or paid for products, new orders may now be more expensive. For example, supplying and fitting cavity wall insulation to a three bed semi-detached home would typically cost £475 today, but with this ruling it will cost £543, an increase of £69.

This could have knock-on effects for the UK’s Green Deal scheme, which offers loans to households and businesses covering the upfront cost of installing energy efficiency measures.

But industry figures played down the possible negative effects. Dave Sowden, chief executive of the Sustainable Energy Association (SEA), told BusinessGreen that no action can be taken until next year’s Budget, as there is not enough time to enact legislation before the government’s mini-Budget on July 8. He added that officials are committed to finding a different legislative pathway to keeping most or all of the rates.

“We’re looking at any implementation being more than a year away in next year’s Finance Bill,” Sowden said. “What we’re saying is ‘don’t panic’. The mood music from the civil servants is looking to preserve [the rates] and find another way rather than ‘this is a complete disaster’.”

Baker Tilly senior tax partner George Bull said the decision was another example of the EU’s willingness to “curtail the UK’s legislative freedom”, and it represents a “direct challenge” to the government’s pledge to lock down tax rates.

It remains unclear what action the government will now take. A Treasury spokeswoman said: “The government will study the judgment carefully and consider next steps.”

But the ruling was strongly criticised by Ashley Fox, leader of Britain’s Conservatives in the European Parliament, who said it “defies common sense” given the European Commission has called on member states to make energy efficiency a priority.

“When you consider the importance these days of promoting energy saving, this judgment is most unfortunate and thoroughly unwelcome,” he added. “People will be aghast when they see the EU on the one hand hectoring member states about carbon reduction while on the other handing down judgments like this.”