VAT rules risk hindering energy efficiency drive, warns CIOT

The benefits of expanding tax relief for the installation of energy-saving materials in buildings may not be fully realised unless the government puts in place special rules enabling relief to be granted even where the installation is part of wider refurbishment work, says the Chartered Institute of Taxation.

The government has set a target to reduce the UK’s overall energy consumption from buildings and industry by 15 per cent by 2030, compared to 2021 levels¹. One of the ways in which it is encouraging work to deliver this is through VAT energy-saving materials (ESM) relief, a temporary relief which applies to the installation of solar panels, heat pumps and insulation, among other things.

In Spring Statement 2022, the government announced its intention to expand the relief. In Spring Budget 2023, the government launched a call for evidence seeking input on, in particular, expanding it to include additional technologies such as battery storage, and extending it to charities.

The CIOT sets out its comments in its response² to this call for evidence. Whilst welcoming the potential expansion, CIOT is concerned that VAT rules that classify a contract as a single or multiple supply pose challenges for installations accompanying wider refurbishment works on homes. This situation means that some ESM installations may not benefit from zero-rating and would be subject to the VAT liability of the broader works.

Gabby Donald, Chair of CIOT’s Indirect Taxes Committee, said:

“VAT relief on energy-saving materials can play a significant role in incentivising people to make their homes more energy efficient. The government are right to be looking to expand it to battery storage and other emerging technologies.

“However, we are concerned that households may be caught by the ‘single supply’ VAT rule which means that if a contractor supplies further significant refurbishment works to the property at the same time they install ESMs, all of the contract price can become subject to VAT. Navigating this creates increased complexity for suppliers and their customers.

“The consultation also considers whether the VAT relief for ESMs should be reinstated for installations for charities, reversing its removal in 2013. In principle the CIOT also welcomes this position, though we note that a large buyer of ESMs for existing dwellings is the housing association sector, who do not always have charitable status. We would like to see a consistent outcome apply across this sector, so that more lower income families can benefit.

“Purchases of ESMs by housing associations can still be caught by the VAT single supply rule if their installation forms part of a larger refurbishment project. We have asked whether a specific carve-out rule for housing associations could be considered. This exception would suspend the usual considerations of single versus multiple supplies for large refurbishment projects and allow the relief to be applied on ESMs.”

The temporary VAT relief on ESMs is due to end on 31 March 2027.