At present, the supply and installation of energy saving materials in a residential property is only subject to the reduced rate of VAT at 5%. Energy saving materials includes the following:
- Solar panels
- Wind or water turbines
- Ground or air source heat pumps
- Micro combined heat and power units
- Boilers designed to be fuelled by wood, straw or similar vegetal matter
- Insulation for walls, floors, ceilings, roofs/lofts, water tanks, pipes etc
- Draught stripping for windows and doors
- Hot water system controls
- Central heating system controls, including thermostatic radiator valves.
In June 2015, the Court of Justice for the European Union (“CJEU”) decided that the 5% rate has been applied incorrectly. To comply with the judgement the UK Government intends to amend the Finance Act in 2016, but will try to retain as much of the 5% rate as possible. Before making any changes the Government has issued a consultation document which runs from 9 December 2015 to 3 February 2016 to allow interested parties to comment on the proposals offered by the Government.
The proposals being put forward cover changes in three main areas, and they are:
A) Installations complying with social policy
B) Other installations in residential buildings
C) Changes to the list of installed goods included within the reduced rate.
The changes proposed in sections A and B will be subject to the changes to the list of goods under section C.A) Installations complying with social policy
The 5% rate will continue to apply to:
- supplies made to people living in dwellings who have a social need, ie those receiving certain social benefits
- supplies to housing associations
- to installations in all buildings used solely for a relevant residential purpose including:
- Institutional residential homes for children
- Similar homes in which residents live by reason of old age, disablement, past or present dependency on drugs or alcohol or mental disorder
- Residential accommodation for students/pupils or the armed forces
- A monastery, nunnery or similar
- An institution which is the sole residency of at least 90% of its residents eg full time dementia unit.B) Other installations in residential buildings
If the cost of goods in an installation exceeds the cost of labour, then the 5% rate will apply to the labour charge and not the goods. The goods will be charged at the standard rate of 20%. Where the cost of goods is lower than the cost of labour, the 5% rate applies to both.C) Changes to the list of installed goods
Solar panels, water and wind turbines are being taken out of the list of energy saving materials as they are not seen as related to renovation works.
The proposals raise a variety of questions:
- As a supplier, how do I obtain proof of “social need” for those receiving benefits? What would constitute acceptable proof?
- On what basis is the cost of goods valued? Does it include any mark up or additional costs eg freight and insurance?
- What happens if the contract is paid in full prior to the change in rules on 1 August 2016, but installation occurs afterwards?
If you wish to respond to the proposals or would be interested in contributing to the Lovewell Blake responses to the consultation, please contact Liz Hill
or Rob Geary
on 01603 663300.
The full consultation document can be found here