A Guide to 0% VAT on Energy Saving Measures
The recent incentive for Green home improvements, announced in Rishi Sunak’s Spring Statement, has slashed VAT to 0% on energy efficiency measures for the next 5 years! It’s fantastic news for homeowners and for installation companies.
The VAT cut has been welcomed by campaigners and experts in the sector who have long argued that the additional cost of VAT on energy efficiency measures discourages people and businesses from investing – a report by the MCS Charitable Foundation confirmed that VAT acts as a barrier to retrofitting.
This blog tells you everything you need to know about the new VAT rules and considers what it means for your business.
There are a few drivers behind the long-awaited VAT cut on energy saving measures. The pressure to decarbonise housing stock in the UK is one. Decarbonising and adapting the UK’s housing for the future is critical for meeting legally binding emissions targets by 2050.
Trade bodies, environmental groups, citizen’s groups, think-tanks, and experts in the renewables sector have for some time urged for measures to improve the energy efficiency of homes and decarbonise at scale.
The second pressure for reform comes from rising energy costs.
Sunak says his VAT tax cut means a family installing solar panels would see a tax saving of roughly £1,000, while they would also save approximately £300 on their energy bills.
Lastly, and perhaps a more controversial driver, is Brexit. Sunak cites Brexit and freedom from EU red tape as one of the reasons he has been able to make the cut. Previously, the UK was constrained by a 2019 European Court of Justice ruling which restricted relief on energy-saving materials to certain residential properties and eligible persons, such as those in receipt of benefits and the over 60s.
Though some would say if this was a true driver, Sunak could have made the cut 15 months ago.
So, next up, what’s included, and is the VAT cut permanent?
What qualifies for the 0% VAT rate and for how long?
The new 0% VAT rate is for 5 years (not permanent). From 1 April 2022 until 31 March 2027 a zero rate applies to the installation of certain specified energy-saving materials in England, Scotland and Wales (Northern Ireland is still subject to EU rules of a minimum 5% VAT under the NI protocol).
Government guidance states energy-saving materials that qualify for 0% VAT are:
- controls for central heating and hot water systems
- draught stripping
- solar panels
- ground source heat pumps
- air source heat pumps
- micro combined heat and power units
- wood-fuelled boilers
In addition, in England, Scotland and Wales:
- wind turbines
- water turbines
The rules also simplify what kind of heat pumps qualify for the zero VAT rating. According to the BESA “Previously, those used for cooling were not eligible for the reduced tax rate, but the only rule that applies now is that the installation must be capable of heating the home.”
Following lengthy talks between the BESA and HMRC, the guidance also now says that “air source reverse cycle heat pump air conditioners can be treated in the same way as monobloc heat pumps for VAT purposes.”
So, what happens at the end of the zero-rated period?
From 1st April 2027, the energy saving measures exempted will revert to the 5% reduced rate of VAT.
Is the 0% VAT worth it?
The BESA’s head of technical, Graeme Fox says, “The cut in VAT is a welcome incentive for business and domestic users, but equally helpful is the simplification of what had been unnecessarily complex tax rules around heat pumps.” In addition, Fox says, “These progressive tax moves are a good start towards a more ambitious national programme that will be needed to tackle lifecycle carbon emissions.”
Others suggest the scheme is flawed and won’t benefit as many people as it proposes. The i reports, for example, that energy saving materials that are installed at the same time as wider heating measures will be subject to the full 20 per cent VAT. “A central heating system may consist of a boiler, radiators, copper pipe, radiator valves, heating controls and insulation.
“If supplied on their own, the radiator valves, heating controls and insulation would qualify for the reduced rate, but they are normally installed as part of a single supply of a central heating system and therefore subject to the standard rate of VAT.”
Overall, the temporary zero-VAT incentive is favourable to both businesses and households. According to the BESA, “These initiatives will be a significant boost to the UK’s plans for decarbonising buildings and could save businesses more than £200m while helping the UK achieve its net zero ambitions.”
What does it mean for businesses in the sector?
Speaking to PHAM News, Kevin Wellman, CEO of the Chartered Institute of Plumbing & Heating Engineering (CIPHE), said: “The 0% VAT rate will help cut costs and increase demand. However, we must ensure systems are designed and installed correctly to offer the required energy savings. Savvy installers will be signing up to renewable training.”
Graeme Fox from the BESA agreed, stating that it was incumbent on government to “consult with the industries directly involved in the decarbonisation of heat, such as building services, to fully understand the implications of its policy proposals not least on the need for investment in training and skills.”
In an industry response statement, Steve Radley, Construction Industry Training Board strategy and policy director, said the VAT cut “will help to create the confidence industry needs to invest in retrofit training.”
The increase in demand for renewables will generate jobs and upskilling opportunities. Another consideration is that engineers in the field will need to become familiar with what qualifies for the temporary Zero Vat rating and what doesn’t. This can be smoothed by robust job costing software.
In conclusion, the VAT cut may not go far enough to support many households to make the switch to renewables (even with the 0% VAT these changes can cost thousands of pounds) but it nevertheless signals the beginning of a Greener future.
For approved software that supports innovation and makes it easy to track costs, get in touch with Joblogic.