Extension of VAT energy-saving materials relief
Published 11 January 2024
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Who is likely to be affected
Businesses that install qualifying energy-saving materials (ESMs), and customers that have ESMs installed, in residential accommodation and certain charity buildings in the United Kingdom (UK).
General description of the measure
Installations of ESMs in residential accommodation currently benefit from a temporary VAT zero rate until 31 March 2027, after which they revert to the reduced rate of VAT at 5%.
This measure extends the relief to installations of ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community.
It also expands the scope of the relief to the following technologies:
- electrical batteries that store electricity generated by certain ESMs and from the National Grid (the grid)
- water-source heat pumps
- diverters that enable excess electricity from certain ESMs to be used within a building in which it is generated rather than exported to the grid
It also adds certain preparatory groundworks that are necessary for the installation of ground- and water-source heat pumps.
Policy objective
The policy objective is to incentivise the installation of ESMs across the UK to improve energy efficiency and reduce carbon emissions.
Background to the measure
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. In addition, 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 our legally binding commitment to reach net zero greenhouse gas emissions by 2050.
At Spring Statement 2022, the government announced an expansion of the VAT relief for the installation of ESMs in residential accommodation in Great Britain. The changes reinstated the relief for wind and water turbines and removed complex eligibility criteria. They also introduced a temporary VAT zero rate until 31 March 2027 (after which installations will revert to the reduced rate of VAT at 5%). The Windsor Framework enabled these changes to be extended to Northern Ireland with effect from 1 May 2023.
While the expansion of the VAT relief was welcomed, there were requests for further changes to make the relief more effective and easier to access. At Spring Budget 2023, the government therefore published a Call for Evidence (CfE) seeking views on potential areas for reform and published a summary of responses to this CfE on 11 December 2023.
This measure implements reforms that the government has judged best meet the objectives of the relief as set out in the CfE, namely:
- improving energy efficiency and reducing carbon emissions
- cost effectiveness
- alignment with broader VAT principles
Detailed proposal
Operative date
This measure will take effect from 1 February 2024.
Current law
Group 2 of Schedule 7A to the Value Added Tax Act 1994 (“Group 2”) applies the reduced rate of VAT to the installation of ESMs in residential accommodation.
Group 23 of Schedule 8 to the Value Added Tax Act 1994 (“Group 23”) applies a temporary VAT zero rate to the installation of ESMs in residential accommodation in Great Britain from 1 April 2022 to 31 March 2027 (the Windsor Framework enabled this to be extended to Northern Ireland with effect from 1 May 2023).
Sections 29A(3) and 96(9) of the Value Added Tax Act 1994 provide power for HM Treasury to make an order to amend Schedule 7A. Sections 30(4) and 96(9) provide power for HM Treasury to make an order to amend Schedule 8.
Proposed revisions
The following changes will be made to Group 2 and Group 23:
-
Reinstatement of the relief for the installation of ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community.
-
The addition of:
- electrical batteries that store electricity generated by certain ESMs and the grid
- water-source heat pumps
- diverters that enable excess electricity from certain ESMs to be used within a building in which it is generated rather than exported to the grid
3. The addition of certain preparatory groundworks that are necessary for the installation of ground- and water-source heat pumps.
Summary of impacts
Exchequer impact (£ million)
| 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 | 2028 to 2029 |
|---|---|---|---|---|---|
| -5 | -20 | -20 | -25 | -20 | -25 |
These figures are set out in Table 5.1 of Autumn Statement 2023 and have been certified by the Office for Budget Responsibility (OBR). More details can be found in the policy costings document published alongside Autumn Statement 2023.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Equalities Impact
It is not anticipated that there will be impacts on those in groups sharing protected characteristics.
Individuals impact
This measure will positively impact individuals who have:
- electrical batteries retrofitted to certain ESMs and the mains electricity
- diverters retrofitted to certain ESMs
- water-source heat pumps installed
- preparatory groundworks carried out for the installation of ground- and water-source heat pumps
Individuals will be able to benefit from lower prices charged by ESM installers. The savings will be subject to the degree to which these businesses pass the VAT savings on to their customers. There is expected to be no impact on family formation, stability or breakdown.
Customer experience is expected to remain broadly the same, as this does not affect how individuals interact with HMRC.
Business and civil society impacts
This measure is expected to have a positive impact on businesses that install ESMs in residential accommodation and in buildings that are used solely for relevant charitable purposes, such as village halls or similar recreational facilities for a local community.
The changes will benefit businesses that:
- retrofit electrical batteries to certain ESMs and the mains electricity
- retrofit diverters to certain ESMs
- install water-source heat pumps in residential accommodation and buildings used solely for a relevant charitable purpose
They will also benefit businesses that carry out preparatory groundworks necessary for the installation of ground- and water-source heat pumps in such circumstances.
These businesses will no longer be required to charge and account for VAT from 1 February 2024 until 31 March 2027 and, subsequently, will only have to account for the reduced rate of 5% on their supplies. They will still be able to recover input tax incurred on making these supplies. In so far as these VAT savings are passed on to consumers, it should boost demand for affected installations. This measure will have a negligible impact on business costs. One-off costs could include familiarisation with the changes. There are not expected to be any continuing costs.
This measure is expected to have a positive impact on some civil society organisations, mainly small charities that run village halls or similar recreational facilities for a local community. One-off costs could include familiarisation with these changes. There are not expected to be any continuing costs or administrative savings.
Customer experience is expected to remain broadly the same, as it does not alter how business or civil society organisations interact with HMRC.
Operational impact (£ million) (HMRC or other)
This measure is not expected to have any additional costs for HMRC.
Other impacts
The measure is intended to encourage greater take-up of ESMs and is therefore expected to contribute to the government’s net zero targets in a positive way.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, contact Sandy Mackie at sandy.mackie@hmrc.gov.uk, or Patrick Wilson at patrick.wilson@hmrc.gov.uk.
Declaration
Nigel Huddleston MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.