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ECJ rules on VAT increase on supply and installation of energy-saving materials

Following the recent European Court of Justice's (ECJ) ruling on 4 June 2015, the UK cannot apply a reduced rate of value added tax (VAT) to the supply and installation of energy-saving materials with respect to all housing.

A reduced VAT rate of 5% currently applies in the UK to the supply and installation of certain energy-saving products and materials in residential properties (such as insulation, solar panels, wind turbines, draught stripping and hot water and central heating controls).

The European Commission had challenged this measure on the basis that it contravened the EU VAT Directive, in that a reduced rate of VAT can be applied only to the "provision, construction, renovation and alteration of housing, as part of a social policy" and to the "renovation and repairing of private dwellings" but excluding materials that account for a significant part of the value of the service supplied.

In agreeing with the Commission, the ECJ ruled that in applying the reduced rate to all supplies of services of installing these materials to all housing, the UK's rules were not adopted exclusively or principally for social interest reasons (within the meaning of EU law). They therefore fell outside the first category of reduced rating. It also ruled that the energy-saving materials covered by the UK legislation extended to materials that accounted for a significant part of the value of the service supplied and were thus not covered by the second category of reduced rated materials.

TLT comment

Any increase in the VAT rate is obviously bad news for consumers, who will have to pay more to make their houses more energy efficient. Furthermore, the UK Government has announced that around £40 million of savings from DECC's budget will fall on energy efficiency subsidies.  It is therefore apparent that the drive to make the UK's housing stock more energy efficient has taken another blow.

The UK Government has said it would "study the judgment carefully and consider next steps" and it will be interesting to see how this develops given the announcement in recent Queen’s Speech to legislate against any VAT increases in the current Parliament.

One possibility is for the UK to consider the "social policy" aspect of the reduced rating category and look to restrict the reduced rating to social housing and/or to certain categories of occupiers.

The ECJ gave some guidance on social policy by concluding that by applying the reduced rate of VAT to supplies and installation of energy-saving materials, "irrespective of the housing concerned and with no differentiation among people living in that housing, in particular with no regard to levels of income, age or other criteria designed to give an advantage to those who have more difficulty in meeting the energy needs of their accommodation", the UK measures could not be regarded as having been "adopted for reasons of exclusively social interest or even for reasons of principally social interest within the meaning of EU law".

The Government could also look at direct subsidies although these would need to be funded (from an ever decreasing pot) and any VAT rate increase may also have adverse implications for the financing of Green Deal initiatives.

With regard to organisations supplying and/or installing energy-saving materials to residential properties, continuing to charge VAT at 5% (where applicable under existing rules) seems sensible until such time as the UK law is altered.  For those considering undertaking energy efficiency projects, it may be worth bringing forward such projects in order to benefit from the 5% rate and reduce the risk of a higher VAT rate being imposed in the future.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2015. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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