How long have we cried out as an industry for energy efficient windows and doors to have the same 5% VAT level as other energy efficient products? Why is it that boilers, cavity wall insulation, loft insulation, draft excluders and other similar products have 5% VAT and our product don’t? How many campaigns have been launched by various bodies to try and right this wrong? The answers are: a long time, it’s not right, and many.
But, out of the blue, there may now be a chance to rectify the situation. It’s a small chance, but an opening we cannot afford to miss. This chance comes in the form of a UK Government consultation.
“infracted by the European Commission”
The UK Government is opening up a consultation to decide on changes on what can constitute a product that qualifies for 5% VAT. It’s having to do this consultation because the European Commission has deemed the UK law on this matter wrong. Here is the Government’s explanation of that slap on the wrist, taken from the consultation document:
The UK was infracted by the European Commission (‘EC’) on its application of the reduced rate of VAT on energy saving materials (‘ESMs’) and subsequently lost its case in the Court of Justice of the European Union (‘CJEU’). The UK is required to comply with the CJEU’s judgment and amend the UK legislation that makes provision for the reduced rate for ESMs.
Oops! Goverment got it wrong. Wouldn’t be the first time. To put the above into some context, this part is definitely worth reading:
Under European legislation, the UK is permitted to have up to two different reduced rates of VAT. Currently, the UK has just one reduced rate at 5%, this being the lowest rate permissible.
Category 10 of Annex III of the European VAT Directive (Dir 2006/112) (‘Annex III’) namely “provision, construction, renovation and alteration of housing, as part of a social policy” is the European vires that the UK relies upon for its current reduced rate for ESMs (in Group 2 of Schedule 7A to the VAT Act 1994 (‘VATA’)).
The UK currently applies the reduced rate to the installation of ESMs in residential accommodation (dwellings and buildings used solely for a relevant residential purpose – such as care homes, children’s homes etc.).
ESMs for the purpose of the reduced rate in the UK are:
1. insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings;
2. draught stripping for windows and doors;
3. central heating system controls (including thermostatic radiator valves);
4. hot water system controls;
5. solar panels;
6. wind turbines;
7. water turbines;
8. ground source heat pumps;
9. air source heat pumps;
10. micro combined heat and power units; and
11. boilers designed to be fuelled solely by wood, straw, or similar vegetal matter.
Consequently, when any of the ESMs above are installed in a residential property and are not part of, or ancillary to, a wider supply of building services, the supply is charged at the reduced rate of VAT (5%).
The EC implemented infraction proceedings against the UK as it considered that the UK’s legislation was not consistent with EU law. The UK defended its legislation but, ultimately, the matter was referred to the CJEU.
Later on the report goes on to say that the UK Govt failed to apply the VAT relief properly, and included items such as solar panels, water turbines and wind turbines when they should not have been. It’s my understanding from the report that once the consultation has been completed, these items will be excluded from the revised relief guidelines.
The bad news
When there is good news and bad news, I find it better to start off with the bad and end things with the good. So the bad news in this case is that there is going to be yet more trouble for the beleaguered solar panel industry.
HMRC predicts problems for business that install solar panels and home owners wishing to purchase them. Long and short of it is, solar panels will now be subject to the full 20% VAT rate, which means a price increase of 15%. Crushing news to solar panel businesses that have already suffered through the demise of the Green Deal and a collapse in the feed in tariff. It’s also bad news for home owners, who have just been getting used to solar panel prices falling.
In reality, this could actually put some companies out of business. This is of course not the intention of the UK Government, but it has no choice as the EC has demanded that changes be made. These are the predictions from HMRC as to the effects of this change:
HMRC considers that the impact is likely to most affect those businesses that install solar panels and members of the public who wish to have them installed.