VAT Treatment of Energy Saving Materials – Current Consultation open until 31 May 2023

At our recent online event Liz Maher, VAT Director from the Xeinadin Indirect Tax team discussed (insert link to recording here) the current VAT rules governing the reliefs available for the supply and installation of Energy Saving Materials (ESM). Currently there are a range of complexities that contractors and customers are experiencing but Liz also alerted CEW delegates to the opportunity to engage with HMRC on the future legislation around this area.

As she 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.

It was interesting to noted that the VAT recovery rules are different for varying bodies – local authorities have generous VAT recovery rules that no not apply to housing associations, universities and many charities even though you may see them all as “public bodies”.

Procurement teams therefore need to avoid making incorrect assumptions on the VAT position of others. Government dept’s and the NHS have another variation on what VAT they can recover which is restricted to a list of specific services.

Liz also mentioned pushback from government funders on grant monies having to be used to cover irrecoverable VAT costs as the funders assumption was that VAT would be recoverable – a fact which is often incorrect.

The session noted that there’s been a long history of using VAT to encourage a change of behaviour – lowering the VAT rate on a supply to encourage greater take up for example – this is true of improving the energy efficiency of our homes where there’s been a history of the Reduced VAT rate (5%) applying since 1998.

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, we learnt, could access the VAT reliefs for building 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.

Having discussed the current complexities, Liz then looked at the new consultation window that’s been opened by HMRC. It asks for evidence as to whether charitable bodies should be returned back in 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.

This is to be welcomed – where should hydrogen offerings sit with the VAT rules? – what about equipment that helps us manage energy consumption such as Intelligent Energy Systems (IES)?

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.

1. 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.

2. 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.

3. 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.

Having listened to Liz’s session we agree that the difficulty with this objective is that the existing rules often feel that they couldn’t be more complicated at the moment.

What was clear is that VAT sensitive sectors such as social landlords or private homeowners looking to improve the energy effectiveness of their homes often end up paying 20% VAT on works that in whole or in part should not attract that higher rate. As CEW appreciates can we blame a contractor from being overwhelmed by the maze of VAT rules in this regard and therefore defaults to the position of “when in doubt – charge VAT at the full rate”. However, having listened to Liz’s VAT update on this area, we do understand that for certain customers the safest position for a contractor may be the most costly for that consumer.

Such consultations on VAT policy are to be welcomed and Liz and the Xeinadin team are certainly encouraging responses by business sectors and industry groups such as CEWales, to the application of VAT in this area in the future.

Unlike Liz and her team 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.

This interaction of VAT with the reality of life creates a welcome opportunity for all of us to inform on-going VAT policies -in a way that ensures VAT law attempts to keep pace with technological change. It avoids VAT being a barrier to consumers engagement with spending on improvements that will not just reduce their longer-term household budgets but the health of our environment longer term.

To contribute to the VAT Consultation process and consider the questions under discussion this link will take you to the paper – 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 – / or call us on 0330 124 7740

Thanks to Liz for the session which was informative as well as thought provoking – just the sort of event that we aim for at CEWales.