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:
Background
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.
Click here to read the full UK Govt consultation report
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.
That’s the bad news. Here’s the stuff that matters to us…
The good news
This is the opportunity the window industry has been waiting for for years. There is a key phrase that dictates what energy saving materials should be included in the VAT relief rates, and it’s this: “provision, construction, renovation and alteration of housing, as part of a social policy“. Clearly, wind turbines, solar panels or water turbines don’t really fall under a category of product that alters a home, or is a renovation.
Windows and doors however do. And that point above is the key to making sure that windows and doors are included in the revised legislation.
New windows are doors are one of the biggest renovations to a home that home owners can do. They dramatically alter the energy performance of a home for the better, as do boilers and central heating systems which are currently enjoying a reduced VAT rate.
Yet, despite the glaringly obvious benefits energy efficient windows and doors bring to any building, they were never included in the original legislation. A terrible error by the UK Government. However, the European Commission has presented our industry with a great opportunity to encourage as loudly and positively as possible for the UK Government to include windows and doors in the revised legislation.
Benefits
A reduction of VAT to 5% on energy efficient window and doors are obvious. It equates to a 15% drop in prices. On big ticket purchases, as new windows and doors are, this represents a significant saving. A news of a VAT reduction on new windows and doors will spread within the general public very quickly.
It will also be the stimulus the Government is looking for to replace the fudged Green Deal. Many of us have long argued that there is no need for a new scheme, instead a VAT reduction will be a far easier idea to market to the general public, will create more demand for the products, so at the same time boosting our industry and helping to insulate homes and lower energy bills on a quicker scale.
The potential of a 15% VAT reduction on windows and doors is massive. We cannot let this chance to grab our slice of the pie go.
Timings
Most consultations take a while. Then they take a year or two to implement. Not in this case. The consultation launched on 9th December 2015 and will conclude on 3rd February 2016. The European Commission has instructed the UK Government to implement changes by 1st August 2016.
This means there is a chance that by summer of next year, we could be selling windows and doors with VAT at just 5%. Something both the industry and home owners across the UK will be very happy about.
There is just one fly in the ointment however. If by February the Government concludes that windows and doors can now be priced with 5% VAT, there is a significant chance that many home owners considering replacing their windows and doors will wait until the changes are implemented to save 15%. This could create a huge dip in trade within the industry, obviously dangerous. How will the Government work round this? Are they obligated to? Will it be left to us to find a way round it? Time will tell.
For now, we need to focus on getting windows and door included in the revised legislation. This is our best chance and we all need to unite to make sure it happens.
