Changes to the VAT treatment on the installation of Energy Saving Materials (ESMs) in Great Britain
At the Spring Statement last month, Chancellor Rishi Sunak announced a five-year temporary zero VAT rate for installation of Energy Saving Materials in England, Wales and Scotland.
This was one of three immediate measures designed to help deal with the rising costs of energy. Currently, only some ESMs qualify for the 5% reduced rate.
What’s the background?
The UK implemented changes required as result of infraction proceedings (European Commission v United Kingdom C-161/14) in 2019, from which time reduced rating of installations of Energy Saving Materials was limited to supplies to individuals who met certain social conditions. Where these conditions did not apply, businesses were required to calculate the value of the goods and service elements individually and the relief would only apply if the service element accounted for over 60% of the total cost of the installation.
The UK was also required to exclude wind and water turbines from the list of qualifying Energy Saving Materials.
Following the UK’s withdrawal from the European Union, and subject to the Northern Ireland Protocol, the UK is no longer bound by the results of the infraction proceeding and businesses had requested the reversal of the 2019 changes to incentivise the take-up of ESMs in line with the government’s net zero objectives.
What changed from 1 April 2022?
The Court of Justice of the European Union derived legislative changes introduced in 2019, which narrowed the scope of the previous relief for installations in residential accommodation in Great Britain are being reversed.
With effect from 1 April 2022 until 31 March 2027, a temporary zero VAT rate will be in place to cover the installation of certain types of ESMs.
After 5 years, on 1 April 2027, the rate will revert to the 5% reduced rate of VAT.
Businesses that provide and install ESMs to customers in England, Wales and Scotland will be eligible for the temporary zero rate.
The complex eligibility conditions such as the social policy conditions and the requirement that over 60% of the total cost of the installation had to relate to the service element when determining the VAT liability will also be permanently removed.
The following are some ESMs which are zero-rated for VAT from 1 April 2022
- Solar panels
- Air source heat pumps
- Ground source heat pumps
- Cavity wall insulation
- Loft insulation
Previously, these ESMs were subject to 5% VAT as long as certain eligibility requirements were met. In some cases, VAT was charged at a 20% rate.
Also brought within the scope of the relief from 1 April 2022 are:
- Wind turbines
- Water turbines
In Northern Ireland, the list of qualifying goods and rate of VAT due on ESM installations will remain unchanged. The Northern Ireland Executive will receive a Barnett share of the value of the relief until it can be introduced UK-wide.
The full government policy paper can be found here.
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The information was correct at time of publishing but may now be out of date.