The European Court of Justice has dealt a blow to the UK government’s policy of applying a reduced rate of VAT for the supply and installation of energy saving measures, such as micro-combi boilers, insulation or solar panels.
In a judgment published on June 4, 2015, following the European Commission’s decision to take the UK to court over failure to comply with the European VAT Directive, the court decided that the supply and installation of ‘energy saving materials’ in the housing sector did not fall into any of the categories in which a reduced VAT rate (currently five per cent in the UK) can apply.
The judgment means that VAT on energy saving materials will have to be charged at the UK standard rate (currently 20%), a decision which will likely impact consumers, housing associations, charities and not-for-profit organisations that are unable to recover VAT on underlying costs.
George Bull, senior tax partner at Baker Tilly – an independent firm of chartered accountants and business adviser – said: “This judgment is a further example of the EU’s willingness to curtail the UK’s legislative freedom, and it presents a direct challenge to the ‘triple lock’ commitments given in the Queen’s Speech. Depending on the government’s response, it could also lead to higher costs for affected groups seeking to improve the energy-efficiency of their homes.”
The UK had defended the VAT relief, stating that its application of the reduced VAT rate was for ‘social policy’ purposes and linked to the UK’s Green Deal scheme to improve the energy efficiency of buildings.
However, the court found that while a policy of housing improvement may produce social effects, the extension of the scope of the reduced rate of VAT to all residential property could not be described as essentially social. As a ‘universal’ policy, the reduced rate of VAT has been applied irrespective of the housing concerned, and with no differentiation or regard to levels of income, age, or other such social interest criteria.
Ian Carpenter, Baker Tilly’s head of VAT, said: ‘The UK has been aware of the European Commission’s challenge that it was in breach of EU VAT rules for years, and previously had to address that breach by removing the VAT reduced rate to the installation of energy saving materials in charitable buildings. Clearly, this did not go far enough.
“Despite this, the UK government must, however, have been confident that this decision would go in its favour, as the recent Queen’s Speech made it clear that new legislation would ensure that there would be no extension to the scope of VAT. This judgment appears to have scuppered those plans.
“We will now have to await how the government will interpret and subsequently react to this decision. It may determine that only social housing tenants can be provided with the supply and installation of energy saving materials at a reduced rate, and that consequently owner-occupiers must pay VAT at the standard rate. It may also need to find a more efficient way of promoting energy efficient materials, while remaining in line with EU VAT law, possibly through the use of direct subsidies. Without addressing such issues, the undoubted impact will be a significant rise in costs for consumers and others installing energy saving materials in residential homes.”
Dave Sowden, from the Sustainable Energy Association (SEA), said: “This is an action by the EU Commission of the most astonishing hypocrisy. In one breath, the commission and the EU Institutions implore Member States to take efficiency and sustainable energy more seriously – yet in the next, they use legal means to try to abolish the very policies the UK has in place to achieve this.
“This perverse decision will have no impact whatsoever on cross-border trade between the UK and the rest of the EU. It is an epic example of Europe meddling in domestic policy for no trading benefit whatsoever. In fact, it is contrary to almost every principle and policy created to reduce consumers’ energy consumption, cut emissions and help boost economic recovery across the EU.
“We are urging the UK government to act now. We believe there are strong legal reasons to retain the reduced VAT rate, enabling hard-pressed consumers to cut fuel bills without paying more to do it. We need to stand up to Brussels on this and find legal means of preserving most of our reduced VAT rates. The new government should make this an essential part of an ambitious strategy to drastically improve the efficiency of our buildings – and ultimately help consumers to permanently reduce their bills.”