Consultation outcome

Call for evidence: VAT energy saving materials relief – improving energy efficiency and reducing carbon emissions

Updated 11 December 2023

1. Introduction

As set out on page 48 of the Autumn Statement 2022, the government has made a commitment to support improvements in energy efficiency across the economy to bring down bills for households, businesses and the public sector, with an ambition to reduce the UK’s final energy consumption from buildings and industry by 15 per cent by 2030 against 2021 levels. Improving the energy efficiency of the UK’s housing stock and increasing the proportion of energy provided from low-carbon, renewable energy sources will be a key part of meeting the legally binding commitment to reach net zero green-house gas emissions by 2050.

The installation of certain energy saving materials (ESMs) in residential accommodation benefits from a VAT relief, supporting households to improve the energy efficiency of their homes by reducing or removing VAT due on installations of qualifying materials. A history of the VAT relief can be found in Annex A.

At Spring Statement 2022 (SS22), the government announced the expansion of this relief in Great Britain (GB), providing tax incentives worth approximately £280 million to improve the energy efficiency of homes over the 5 years to 31 March 2027. The changes reversed restrictions introduced in 2019 following a Court of Justice of the European Union (CJEU) ruling. This included re-instating wind and water turbines as qualifying materials and removing complex eligibility conditions, which prevented business and households from accessing the relief. SS22 also announced that qualifying installations, such as insulation, heat-pumps and solar panels, would benefit from a temporary VAT zero-rate in GB until 31 March 2027. See Annex B for list of qualifying energy saving materials.

The Windsor Framework would enable the UK government to apply the changes to the VAT relief for Energy Saving Materials announced at Spring Statement 2022, and further changes to the relief associated with this call for evidence, in Northern Ireland. The government will return to this in due course, once the Windsor Framework has been ratified.

While the expansion of the VAT relief for the installation of ESMs announced at Spring Budget 2022 was welcomed, there have since been requests for further changes to make the relief more effective and easier to access. This call for evidence seeks views on 2 further potential areas for reform to the VAT relief for ESMs that may enable the relief to meet its intended objectives more effectively across the whole of the UK (see Chapter 2).

Firstly, this call for evidence seeks views on the inclusion of additional technologies that meet the government’s objectives for the relief.

Since the introduction of the relief in 1998, the list of qualifying technologies has grown from insulation and central heating and hot water system controls, to include solar panels, wind and water turbines, ground and air source heat pumps, micro combined heat and power units, and wood-fuelled boilers. However, since 2006, the list has remained the same with the exception of wind and water turbines, which were excluded in 2019, but reintroduced in Great Britain in 2022, and, subject to the ratification of the Windsor Framework, will be reintroduced in Northern Ireland in 2023 . The government is now considering whether the current list (see Annex B) of qualifying materials is up to date, thus ensuring that the relief is as effective as possible. See Chapter 3 for more details.

Secondly, this call for evidence seeks views on whether the relief should be re-introduced for installations of ESMs in buildings intended solely for a relevant charitable purpose.

Prior to 2013, UK legislation provided a VAT relief for ESM installations to charitable premises. However, this was withdrawn in 2013 following discussions with the European Commission, which asserted that this approach was not consistent with European Union (EU) law. As the UK has now left the EU, the government can consider reinstating this relief. See Chapter 4 for more details.

2. The objectives of the ESMs relief

The government will evaluate the reform proposals outlined in the introduction (Chapter 1) against the 3 objectives for the relief as set out below. Regardless of whether any reform proposals meet the 3 objectives, the government retains its discretion to make decisions on tax policy reform as part of the Budget process, taking account of the wider fiscal context.

The 3 key objectives are:

1. Improving energy efficiency and reducing carbon emissions
2. Cost effectiveness
3. Alignment with broader VAT principles

Objective 1: Improving energy efficiency and reducing carbon emissions

The primary purpose of any technology included in the relief for ESMs should be to reduce demand for energy derived from fossil fuels. This could be achieved through the on-site production of energy from a renewable source (such as solar, wind or water), or improving the capability to retain or preserve energy within a property.

This will not include domestic appliances, such as white goods, that have a different primary purpose. For example, the primary purpose of a washing machine is to wash clothes and will not be included within the relief even if it is designed to minimise the use of electricity.

Objective 2: Cost effectiveness

A tax relief should be a cost-effective and practical lever for encouraging the installation of any qualifying material included in the scope of the relief. Reforms which are unlikely to change consumer behaviour but would still a have significant fiscal cost would not represent a cost-effective intervention.

Objective 3: Alignment with broader VAT principles

Any expansion of the relief should not undermine broader VAT principles – this would risk introducing uncertainty and additional complexity for taxpayers and HMRC, and could lead to legal disputes. For example, where an ESM is installed as part of a wider single supply, it would not be appropriate to enable the ESMs element to be carved out of the wider single supply, as this would create uncertainty as to the broader VAT treatment of supplies involving multiple components.

3. Reviewing the list of technologies eligible for VAT relief

Other than wind and water turbines, the list of qualifying ESMs has remained the same since 2006 (see Annex A for full history of the relief). Technology may have been developed since 2006 which would meet the 3 objectives set out in Chapter 2 but would currently not qualify for the VAT relief.

Having delivered the SS22 changes at pace, the government is now able to take time to review the technologies eligible for the relief, following the routine tax policymaking process to ensure that the relief is as effective as possible.

Battery storage

The government has received multiple requests to add electrical battery storage to the list of qualifying technologies.

If you think that we should consider electrical battery storage for inclusion within the relief, please answer the following questions:

Do you think battery storage should be included in the relief when:

Question 1: Retrofitted to a solar panel or other ESMs (please provide details)?

Question 2: As a standalone technology, not connected to another ESM?

If so:

Question 3. Can you explain how this type of battery storage would meet each of the 3 objectives set out in Chapter 2?

Question 4: Can you explain how this type of battery storage operates?

Question 5: What is the typical cost of installing this type of battery storage in residential accommodation?

Question 6: What are the advantages and disadvantages of including this type of battery storage within the relief?

Other technologies

Are there any other technologies you believe meet the 3 objectives, but do not currently qualify for the relief?

If so, for each technology, can you answer the following questions (including evidence where possible):

Question 7: How would you describe and define this technology for the purposes of the ESMs relief?

Question 8: How does the suggested technology meet each of the 3 objectives in Chapter 2?

Question 9: Can you explain how this technology operates and does it work conjunction with other technology? If so, how?

Question 10: What is the typical cost of installing this technology in residential accommodation?

Question 11: What are the advantages and disadvantages of including this technology within the relief?

Are there any technologies which currently qualify for the relief which you believe do not meet the 3 objectives and should not qualify for the relief?

If so:

Question 12: Which technology does not meet the 3 objectives?

Question 13: Can you explain why you think that this technology does not meet any of the 3 objectives and therefore should not be included within the relief?

4. Charities

Prior to August 2013, UK legislation provided a VAT relief for the installation of ESMs in a building intended for use solely for a relevant charitable purpose.

A relevant charitable purpose means, use by a charity otherwise than in the course or furtherance of business.

Discussions with the European Commission identified that the UK’s application of the ESM relief to charitable buildings was not compatible with EU law, and the relief was subsequently narrowed to exclude charitable buildings. Since 2013, the relief has only applied to installations of qualifying materials in residential and domestic accommodation. Now that the UK has left the EU, the government can consider reinstating the relief to buildings used for a relevant charitable purpose.

Question 14: Do you think the relief for the installation of ESMs in a building intended for use solely for a relevant charitable purpose should be reinstated? And if so, why?

Question 15: As a charity are you considering installing ESMs in your buildings?

• if yes, what ESMs are you considering installing?
• what impact would VAT relief have on this decision?

Question 16: To what extent do you think that charities would benefit from the reinstatement of this relief?

Question 17: What are the advantages and disadvantages of reinstating the relief?

5. Other issues

We would welcome input at this stage on any wider suggestions as to how the relief could be reformed to operate more efficiently and effectively.

Suggestions should take account of the objectives for the relief as set out in Chapter 2.

Question 18: Are there any other suggestions you have for making the relief more effective and efficient?

Question 19: Are there any other issues that you would like to raise?

6. Summary of questions

Battery storage

Do you think battery storage should be included in the relief when:

Question 1: Retrofitted to a solar panel or other ESMs (please provide details)?

Question 2: As a standalone technology not connected to another ESM?

If so:

Question 3: Can you explain how this type of battery storage would meet each of the 3 objectives set out in Chapter 2?

Question 4: Can you explain how this type of battery storage operates?

Question 5: What is the typical cost of installing this type of battery storage in residential accommodation?

Question 6: What are the advantages and disadvantages of including this type of battery storage within the relief?

Other technologies

Are there any other technologies you believe meet our objectives, but do not currently qualify for the relief?

If so, for each technology, can you answer the following questions:

Question 7: How would you describe and define this technology for the purposes of the ESMs relief?

Question 8: How does the suggested technology meet each of the 3 objectives in Chapter 2?

Question 9: Can you explain how this technology operates and does it work conjunction with other technology? If so, how?

Question 10: What is the typical cost of installing this technology in residential accommodation?

Question 11: What are the advantages and disadvantages of including this technology within the relief?

Are there any technologies which currently qualify for the relief which you believe do not meet the 3 objectives and should not qualify for the relief?

If so:

Question 12: Which technology does not meet the 3 objectives?

Question 13: Can you explain why you think that this technology does not meet any of the 3 objectives and therefore should not be included within the relief?

Charities

Question 14: Do you think the relief for the installation of ESMs in a building intended for use solely for a relevant charitable purpose should be reinstated? And if so, why?

Question 15: As a charity are you considering installing ESMs in your buildings?

• if yes, what ESMs are you considering installing?
• what impact would VAT relief have on this decision?

Question 16: To what extent do you think that charities would benefit from the reinstatement of this relief?

Question 17: What are the advantages and disadvantages of reinstating the relief?

Other issues

Question 18: Are there any other suggestions you have for making the relief more effective and efficient?

Question 19: Are there any other issues that you would like to raise?

7. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

Stage 1: Setting out objectives and identifying options.

Stage 2: Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3: Drafting legislation to effect the proposed change.

Stage 4: Implementing and monitoring the change.

Stage 5: Reviewing and evaluating the change.

The call for evidence is taking place during Stage 1 of the process. The purpose of this call for evidence is to seek views on 2 specific areas. Firstly, whether there are additional technologies that should be considered for inclusion within the current list of ESMs. Secondly, whether the previous relief for buildings solely used for a charitable purpose should be reinstated.

How to respond

A summary of the questions in this consultation is included at Chapter 6.

Responses should be sent to the VAT Reliefs Team by 31 May 2023 by email, or by post to:

HM Revenue and Customs
VAT Reliefs Team
B7.25
7th Floor
14 Westfield Avenue
Stratford
London
E20 1HZ

Please do not send consultation responses to the Consultation Coordinator.

Paper copies of this document in Welsh may be obtained free of charge from the above address.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

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This call for evidence is being run in accordance with the government’s Consultation Principles.

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Annex A: History of the VAT relief for ESMs

The VAT (Reduced Rate) Order 1998 introduced a reduced rate of 5% VAT for the grant-funded installation in the homes of people on certain specific benefits of ESMs, such as insulation and central heating system controls. The relief applied to supplies made on and after 1 July 1998.

The Order added new provisions to the then Reduced Rate Schedule, Schedule A1 to the VAT Act 1994. The relief covered all the supplies made under the government’s Home Energy Efficiency Scheme (HEES) (known as the Warm Front Scheme since 2000), to the extent that the installation was paid for by grant-funding.

The rationale for the applying the reduced rate was that as domestic consumers paid 5% VAT on domestic fuel and power, there was therefore a disincentive to improve energy efficiency if VAT on energy-saving products remained at the then standard rate of 17.5%. Consequently, with effect from 1 April 2000, the scope of the reduced rate was extended to the supply and installation in all residential accommodation or charity buildings - whether grant-funded or not. Solar panels were added to the Reduced Rate Schedule from 1 April 2000.

Schedule A1 to the VAT Act 1994 was re-enacted as Schedule 7A to the VAT Act 1994, with effect from 1 November 2001. The scope of the reduced rates for installations of energy saving materials and grant-funded installations of heating equipment was not affected.

On 1 June 2002, the relief was further extended to the grant-funded installations of factory-insulated hot water tanks, micro combined heat and power systems, and renewable source heating systems.

From 1 August 2013, the reduced rate relief was withdrawn for installation of energy saving materials in accommodation or buildings used for relevant charitable purposes. This was due to the European Commission’s view was that the UK’s application of the reduced rate to energy saving materials exceeded possibilities offered in the Principal VAT Directive 2006/112/EC (Category 10) and therefore was illegal.

The UK accepted the European Commission’s position, as buildings intended for relevant charitable business did not classify as housing in Category 10, and amended the UK legislation accordingly. However, the UK rejected the European Commission’s view that its application of energy saving materials reduced rate was ultra vires. The matter was addressed in the CJEU in case C-161/14, where it was held that aspects of the reduced rate was ultra vires as it fell outside the scope of Category 10 rulings.

Over 2015 and 2016, the government consulted on potential changes to the UK legislation to comply with the CJEU judgment.

Following further discussions with the European Commission, in 2019, the UK removed the reduced rate for the installation of wind or water turbines. However, the reduced rate remained fully available on supplies of services installing ESMs in residential accommodation and it remained available, provided that the open market value of supply of energy saving materials did not exceed 60% of the cost (excluding VAT) of the total value of the supply of installing the ESMs to the customer. If it did exceed 60% then only the labour cost element qualified for the reduced rate.

Following Spring Statement 2022, the government expanded the VAT relief for ESMs by introducing a temporary zero-rate on the installation of ESMs in residential accommodation in GB until 31 March 2027, after which the installation will automatically revert to a reduced VAT rate of 5%. These changes also reversed the 2019 changes by reintroducing the relief to wind and water turbines and removing the complex eligibility conditions in GB.

The Windsor Framework would enable the UK government to apply the changes to the VAT relief for Energy Saving Materials announced at Spring Statement 2022, and further changes to the relief associated with this call for evidence, in Northern Ireland. The government will return to this in due course, once the Windsor Framework has been ratified.

Annex B: Current list of qualifying ESMs

The list of qualifying ESMs benefiting from the zero rate is as follows:

• Controls for central heating and hot water systems
• Draught stripping
• Insulation
• Solar panels
• Ground source heat pumps
• Air source heat pumps
• Micro combined heat and power units
• Wood-fuelled boilers
• Wind turbines
• Water turbines