Energy Saving Materials VAT Relief – Changes announced

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Xeinadin Group

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The UK Government, on the 11th December 2023, shared details of the responses they received from interested parties involved either as suppliers, customers or advisers such as ourselves, to the call for evidence on how to broaden the access to the current VAT Zero Rate relief on the supply and installation of Energy Savings Materials.

It’s an area of particular concern to our clients in the housing association, university and charity sector but is also very relevant for private residential landlords of any size and, of course – commercial suppliers and installers of such equipment as well as construction firms.

Background

UK Government launched a Call for Evidence (CfE) at the Spring Budget 2023 regarding VAT relief on energy-saving materials (ESMs). At the Autumn Statement 2023, the government announced further reforms to this relief to be implemented across the UK. Whilst the government was unable to extend the existing VAT relief to all additional technologies that had been suggested in response to the CfE, there is some good news to share. All of the suggestions made that were successful were chosen by evaluating against improving energy efficiency and reducing carbon emissions, cost effectiveness, and alignment with broader VAT principles. Key in that will be “fiscal cost” to the Treasury.

Good News!

Electrical Battery Storage

Batteries that store electricity generated by solar panels, wind turbines and water turbines already qualify for VAT relief when installed alongside a qualifying ESM. However, the government now recognises this technology as qualifying for VAT relief on its own, meaning that the technology now also qualifies for VAT relief when retrofitted to a qualifying ESM, or installed as a standalone technology connected to the grid.

Heat Pumps and Diverters

A range of alternate technologies were proposed for VAT relief under the CfE. The government will bring the installation of water-source heat pumps and diverters within the scope of its relief.

It will not include one of the most frequently requested technologies, thermal storage, as officials were unable to identify a definition of “thermal storage” that would be suitable for tax legislation, and to identify sufficient independent data regarding the technology’s efficiency. However, the government stated it may re-evaluate this technology as it develops further. Thermal storage will continue to be zero rated for VAT purposes when installed at the same time as a qualifying ESM, as the technology is ancillary to qualifying supply.

Charities

Prior to August 2013, UK legislation provided VAT relief for installation of qualifying ESMs in buildings used solely for relevant charitable purposes. This was rescinded as this relief was found to be incompatible with European Union (EU) law. Now the UK has left the EU and agreed the Windsor Framework, the government will reinstate this relief, meaning qualifying charities can install qualifying ESMs VAT free until the relief sunset date of 31 March 2027. To note, a statutory 5% de minimis threshold is applied to the word “solely” regarding qualifying buildings must be used “solely for charitable purposes”. This means that buildings that are used 95% for non-business purposes qualify, including village halls, sports pavilions, church halls and community centres.

The use of the qualification of a charitable use building will likely exclude offices run by bodies such as housing associations as their activities as social landlords fall to be seen as business for this purposes but it is certainly an aspect that would be appropriate for charities to consider on relevant projects.

Heat Pump groundworks

Groundworks necessary for installing ground-source and water-source heat pumps are often completed by two separate companies, creating two independent supplies – only one of which currently qualifies for VAT relief. The government will ensure these both qualify by adding a specific and limited list of groundworks to the VAT relief.

These types of works are often co-contracted to different suppliers but this will not restrict the ability to access the zero rate for the relevant groundworks to be listed.

Not so Good News

Items suggested for inclusion in the existing Zero rate reliefs such as energy efficient technologies around:

  • Lighting
  • Ventilation
  • Storage

Did not meet the criteria for inclusion. They also stopped short of technologies that whilst having energy-saving qualities would still be reliant on fossil fuels to work.

The guidance note did, however, note that the retro fitting of a hybrid heat pump to an existing fossil fuel heating system (gas boiler based perhaps) was already included in the existing scope to qualify for zero rating when installed.

Apportionment

This was a particular aspect that we raised in our submission on the consultation, and it is very disappointing to see that no way forward has been outlined on this.

There are examples in other areas of construction works where the works can be apportioned into the differing VAT liabilities, but the government remains unmoved in its application to contracts for construction works where only an element – irrespective of cost value – relates to the supply and installation of qualifying ESM’s.

They considered the application of apportionment could lead to legal disputes therefore being costly to taxpayers, too broad in application and the evidence that HMRC would require from taxpayers to be “burdensome for consumers to provide and for HMRC to process”.

Many of our VAT sensitive housing associations and universities would surely take a differing view as they spend millions of pounds on retrofit projects to their residential properties with the associated VAT costs that they are unable to claim back.

Summary

The government will bring the following technologies within scope:

  • Electrical battery storage
  • Water-source heat pumps
  • Diverters retrofitted to ESMs such as solar panels and wind turbines

The relief will also be extended to the installation of all qualifying ESMs in buildings used solely for a relevant charitable purpose (currently applies to residential buildings).

A discrete list of groundworks necessary for the installation of certain types of heat pumps will also be brought within scope of the relief.

The government intends to implement these reforms on 1 February 2024. They will apply across the whole of the UK until the relief sunsets on 31 March 2027, when the installation of all technologies in scope of this relief will revert to the 5% reduced rate of VAT.

Extension of the Zero Rating beyond the 31 March 2027 date has not been completely ruled out but will, it seems, have to rely of the state of finances for whatever government is in power in 2027.

Projects involving the supply and installation of ESM remain an area where VAT does get complicated. These plans for further items to be included from the 1st February are to be welcome. They may also warrant relevant projects being delayed slightly to ensure they costs fall after that date. However, with the risk of the return to the reduced VAT rate of 5% from the 1st April 2027 don’t delay projects too long if you are an organisation that is unable to recover the VAT you incur on such projects.

Should VAT expert support be required then please do get in contact with us by using the contact form below and one of our experienced VAT advisors will be in touch.

This note is for information purposes only and specific advice should always be sought.

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