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14th April 2023

Partner Insight: VAT Treatment of Energy Saving Materials

At Chambers Wales South East, South West and Mid, we see businesses across our regions in Wales who are heavily engaged in new green technologies.

We are all aware of the drive to reduce energy consumption across our homes and businesses, to improve the energy efficiency and to generate energy from renewable sources. Our members and networks are working hard to deliver innovative solutions and grow into new markets.


An issue allied to this technology has caught our eye and we would encourage businesses to take a step forward and see if they have suggestions that could open up VAT policy in this area to help encourage a behavioural change that will drive growth further and quicker.


VAT and Energy Saving Materials

There are specific VAT reliefs that enable the supply and installation of qualifying Energy Saving Materials to be ZERO rated for VAT when installed in a residential building till 31 March 2027.

Sounds straightforward until you start to look at what qualifies as the “right” sort of energy saving materials and you find that the list is quite short :

  • insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings;
  • draught stripping for windows and doors;
  • central heating system controls (including thermostatic radiator valves);
  • hot water system controls;
  • solar panels;
  • wind turbines;
  • water turbines;
  • ground source heat pumps;
  • air source heat pumps;
  • micro combined heat and power units;
  • boilers designed to be fuelled solely by wood, straw or similar vegetal matter.


New technologies – hydrogen based, intelligent energy systems and the like don’t appear at all.


Battery storage is one of the items up for debate and whilst it would qualify at the time of the installation of the qualifying item – say solar panels – later battery capacity would not. This doesn’t feel like VAT rules are helping to change our behaviour to help meet the UK’s 15% energy saving targets. What about extending the VAT reliefs to include charitable use buildings as opposed to just residential ones? Broaden the demand and encourage the markets you would think.


At the Chamber Liz Maher, from our VAT Partner – Centurion VAT, has alerted us not just to the current VAT rules governing the reliefs available for the supply and installation of Energy Saving Materials (ESM) but also to the opportunity to engage with HMRC on the future legislation around this area.


As Liz explained, for contractors the preference may be to charge 20% on all types of contracts relating to ESM works but for many potential customers – charities, housing associations, residential landlords, universities with student accommodation and private householders; VAT is a real cost as it cannot be recovered by these VAT sensitive sectors. Plus, for suppliers getting the VAT treatment into the qualifying VAT relief areas, could prove to be a real competitive advantage in these cost-conscious times.


HMRC have a real stake in the discussion as VAT generates the 2nd largest tax take across the UK – TWICE that generated from Corporation Tax – so it’s a major revenue support for governments of any political hue in helping fund public policy and services. If a relief is announced, then clearly the question they will ask is – at what cost to that revenue stream?


As Liz mentioned, the current VAT rules to access the reliefs that are available are not without their complexities:

  • what sorts of Energy Saving Materials are actually included in the “qualifying list” – double glazing and damp proofing systems are excluded currently;
  • what happens if other works are included within a single contract – a process encouraged it seems by procurement, yet which works against being able to access the existing VAT reliefs;
  • Can the non- qualifying elements be regarded as “ancillary” or “incidental” to a main supply which is of qualifying ESM works? – often an area of real challenge with HMRC.


Over the years to 2022 there’s been changes to what’s in or out of the VAT reliefs as it relates to the supply and installation of Energy Saving Materials – in the past charities could access the VAT reliefs for buildings they upgraded even though they were not residential in nature as long as they were used to support their non-business charitable activities – say a community hub or day centre. Access to that was removed in August 2013 largely due to the European Commission’s view that for the UK to extend the relief in this was not legal.


Now the UK is out of the European Union any UK government is unfettered from such concerns, so it comes back to the financial impact to tax revenues allied to wider economic imperatives to encourage an industry to grow or environmental ones – to reduce the cost of energy by improving efficiency.


Now is the time to have your say:

The consultation window that’s been opened by HMRC enables businesses across the UK to make an impact on future VAT reliefs that could apply in this area. It asks for evidence as to whether charitable bodies should return to qualifying for the VAT reliefs available for ESM, BUT ALSO what types of technologies should be included in the current list of qualifying energy saving materials. This process invites us to forward plan for technology changes as arcane VAT law often lags behind technology in this regard.


As Liz explained it not simply a case of putting in our “wish list” as there are three stated objectives which are guiding current government tax policy when looking at any expansion to the VAT reliefs on encouraging us to install energy saving materials.


  • Any reliefs should be able to reduce demand for energy derived from fossil fuels This is not about getting a lower VAT rate on a greener, cleaner washing machine it’s about encouraging onsite production of energy from green sources or how we can improve the capacity to retain energy in our homes.
  • Any tax relief – which includes lowering the VAT rate from the standard 20% to a lower rate charged by the supplier must be both cost effective and practical – resulting in a step change in behaviour.


Often there’s been an argument that lowering the VAT rate on a product just results in the business maintaining its pricing levels and not passing on the reduction to its end customer – so if the intention is to encourage a greater take up on an item the customer needs to see that saving directly.


  • Policy changes must align with “broader VAT principles”. VAT is complex enough to manage at the moment – therefore any more changes to VAT rules need to make the VAT treatment less open to ambiguity the policy mandarins’ state.


Such consultations on VAT policy are to be welcomed and Liz and the Xeinadin VAT team are certainly encouraging responses by businesses and Chamber of Commerce bodies such as Chambers Wales, to the application of VAT in this area.


Unlike Liz and the Centurion team at Xeinadin, we are no VAT experts but we could all benefit from more straightforward VAT regulations to provide certainty for taxpayers and encourage growth in green technologies alongside the desire to improve energy efficiency in our homes and businesses.


You can join Liz at a free to access VAT webinar on Wednesday 10th May 0930-1030 which will cover the current VAT rules and the complexities that have triggered the consultation. Register here to attend.

VAT Consultation process paper can be found on this link – responses are need by the 31st May 2023 to HMRC.

If you do need support when VAT gets complicated, then do get in touch with Liz and the Xeinadin Indirect Tax team at Centurion:

Liz Maher OBE – liz.maher@xeinadin.com / indirecttax@xeinadin.com or call on 0330 124 7740

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