VAT Treatment of Energy Saving Materials (ESM)


Xeinadin Group



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Current Consultation open till 31 May 2023

At Xeinadin Group, as forward-thinking business advisors we look for ways in which our clients can influence tax policies affecting their business. 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.

VAT is proving a complex issue in this area we would encourage our networks and clients to learn more about the recently announced VAT consultation and help contribute a response to HMRC on the consultation questions being asked. We will be holding an online webinar on Wednesday 10th May 0930-1030 to give background to the current VAT rules on ESM but also to share the consultation questions.

First some background:

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.

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?

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.

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.

Liz Maher – VAT Director in the Xeinadin Indirect Tax team – will be delivering a free to access VAT webinar on Wednesday 10th May 09:30 am -10:30 am which will cover the current VAT rules and the complexities that have triggered the consultation.

To register, please click the button below.

The VAT Consultation process paper can be found on this link – responses are needed 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 by completing the contact form below.

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