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Air conditioning units included for 0% VAT ESM's

Does reduced rate VAT apply to air-con units?

Didn't find your answer?

Are air conditioning units considered as Energy Saving Materials (ESM's) and therefore qualifying for reduced rate VAT, now 0%?

I'm struggling to tie-down an answer. Let's presume that the Air-con units both cool and heat and are installed by the seller in a domestic setting.

The questions is essentially are these air-con units "Air Source Heat Pumps"?

My research so far: Energy-saving materials and heating equipment (VAT Notice 708/6) - GOV.UK (www.gov.uk)

Go para 2.9 > 2.17 which reads:

“While the legislation for energy-saving materials (Note 1 of Group 2 of Schedule 7A of the VAT Act 1994) includes air source heat pumps within the meaning of energy-saving materials, it does not refer to air conditioning units.”

This contrasts to my clients large competitors saying things like the following:

https://www.seasonalcontrol.co.uk/zero-rate-vat-on-air-conditioning-installation/

So do Air conditioning installers need to charge VAT on domestic installations? The new announcement (Spring 2022 statement) means NO, they do not need to charge VAT to residential customers

When it comes to heating the home will this also include air conditioning units similar to boiler systems and thermostats? Air conditioning units are covered because they are considered to be air source heat pumps by virtue of its technology and dual use.

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I just wondered if anyone has an experience in the area / knowledge if the interpretation has been tested or how it's usually applied? 

 

Replies (17)

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By Mr_awol
04th Apr 2022 11:45

I don't know, and I'll be honest i haven't done any research as i imagine if you have already looked and haven't found it, then it's not going to be something i find instantly.

However, the notice you have linked hasn't been updated for over a year, and the website you have linked suggests that not only has the rate been reduced, but also that the requirements have changed as a result of the Spring Statement - so If i were you I'd probably be looking for anything that came out as a result of the statement widening the scope of the ESM treatment.

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Replying to Mr_awol:
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By Mr_awol
04th Apr 2022 12:03

Mr_awol wrote:

i imagine if you have already looked and haven't found it, then it's not going to be something i find instantly.

OK so maybe not instantly, but I decided to spend five minutes and see if i could come up with anything fairly quickly.

It isn't the answer, but might lead you down the right path. It seems that the current VAT notice you linked was updated Feb 2021 but the previous (august 2019) notice had a different text at 2.17:

VAT_Notice wrote:
2.17 Air source heat pumps
Air source heat pumps use the air as a source of heat. They absorb heat from the outside air which can be used for radiators, underfloor heating and hot water within the home.

Some air source heat pumps can be reversed so that they draw heat from inside a building, thus providing cooling during the summer as well as indoor heating for colder periods of the year.

While some air conditioning units can be used as heaters, this is not the same technology so they do not fall within the definition of air source heat pumps

So, it would appear that the difference may be in the technology or the interpretation. It may well be that there's case law which caused HMRC to update the notice but your free five minutes is up so I'll leave the rest to you.

Edit: Jason posted more, quicker, so read his post (below) instead.

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By Jason Croke
04th Apr 2022 11:56

My view is that air source heat pumps are entirely different to air conditioning units, they both use the same technology of refrigerant to alter air temperature but air source heat pumps have the ability to generate heat, air conditioning units do not.

The guidance at 2.17 has changed over the years, in 2014 it stated ONLY air source heat pumps were energy saving materials.
http://web.archive.org/web/20190727165353/https://www.gov.uk/guidance/va...

In 2019 it said "Air source heat pumps use the air as a source of heat. They absorb heat from the outside air which can be used for radiators, underfloor heating and hot water within the home. Some air source heat pumps can be reversed so that they draw heat from inside a building, thus providing cooling during the summer as well as indoor heating for colder periods of the year. While some air conditioning units can be used as heaters, this is not the same technology so they do not fall within the definition of air source heat pumps."
http://web.archive.org/web/20200929022003/https://www.gov.uk/guidance/va...

Then in February 2022 it stated "While the legislation for energy-saving materials (Note 1 of Group 2 of Schedule 7A of the VAT Act 1994) includes air source heat pumps within the meaning of energy-saving materials, it does not refer to air conditioning units. Deciding whether any particular product is to be treated as an air source heat pump will depend on the facts of the case."
http://web.archive.org/web/20220304201136/https://www.gov.uk/guidance/va...

So you can see a historical theme and that HMRC (and me) see air conditioning as not ESM, but the latest guidance does create some ambiguity but I think only to the extent that technology moves fast and HMRC do not want to exclude something that fits their definition in the future.

My second view is that the law on ESM is all about keeping heat in the home and generating heat in energy saving manner - if you look at the list of ESM, it is things like controls, draught exclusion, loft insulation are all about retaining heat and things like solar panels, wind turbines and air source heat pumps are all about generating heat in an energy efficient manner.

Again, the historical guidance was previously explicit that only air source heat pumps with the overall objective of heating a home efficiently.

The link to the supplier, they only seem to sell air conditioning units. They don't have a dual purpose like air source heat pumps, they install air conditioning units which are neither designed to keep heat in or crucially, create heat. I fail to see how an air conditioning unit can qualify as an energy saving material - what energy is it saving? What heat is it generating?

A quick google "air conditioning, zero VAT" and loads of sellers pop up, but most make clear they refer to air source heat pumps, some sellers only sells heat pumps, others sells heat pumps and air conditioning units but the zero rate is on their "news/update" pages, not under the specific items they sell.

So I'm with you on the confusion and ambiguity, but as a VAT person I can see a clearer line in the sand. We had the same confusion with eat out to help out and to a lesser extent the reduced rate for hospitality where we saw people asking if bowling alleys were reduced rated (no), etc.

With air source heat pumps, their primary purpose is to generate heat from external air in an energy efficient manner, there is a secondary function that allows the pump to work in reverse. The government isn't giving £5k grants to households to install air con, the grant is to remove gas boilers and replace with energy efficient heating.

Of course the interpretation hasn't been tested, it's only been 4 days since the law changed. It's typical of the industry though, so much ignorance and poor selling techniques (not that the consumer will see lower prices, just more profit margin).

The legislation states air source heat pumps are energy saving materials, there is no mention of air conditioning units in the law because they do not meet the purpose of the law. The guidance at 2.17 isn't ambiguous per se, it's just accepting there are various products on the market that may fall between being an air source heat pump and an air conditioning unit/that a line is drawn somewhere.

You could always do a non-stat clearance to HMRC and explain that everyone else is zero rating (with links to competitors) and HMRC will either confirm zero rating or state it is standard rated (and they now have a list of competitors to go attack/easy wins for HMRC).

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Replying to Jason Croke:
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By Wanderer
04th Apr 2022 11:57

Jason Croke wrote:

My view is that air source heat pumps are entirely different to air conditioning units, they both use the same technology of refrigerant to alter air temperature but air source heat pumps have the ability to generate heat, air conditioning units do not.

Most air con installed nowadays appears to heat as well as cool. Certainly the last couple I have had done do so.
https://ams.limited/can-an-air-conditioner-be-used-to-heat-a-room/
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Replying to Wanderer:
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By Mr_awol
04th Apr 2022 12:21

Wanderer wrote:

Most air con installed nowadays appears to heat as well as cool. Certainly the last couple I have had done do so.
https://ams.limited/can-an-air-conditioner-be-used-to-heat-a-room/

They do - but my assumption was/is that there is some sort of technical difference between a leaf blower that can be reversed to suck air in, and a hoover that can be reversed to blow air out.

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Replying to Jason Croke:
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By Hugo Fair
04th Apr 2022 15:19

I never thought I'd be writing to disagree with Jason (but at least my quibble doesn't directly concern VAT even if the OP does) ...

".. if you look at the list of ESM, it is ... all about retaining heat and things like solar panels, wind turbines and air source heat pumps are all about generating heat in an energy efficient manner."

The drive (ecologically, politically and legislatively) has nothing to do per se with generating heat - it is all about moving to methods of generating energy that are less damaging to the environment.

There IS a side issue in that, until (if ever) we are getting all our energy from truly 'clean' sources, it behoves us to do whatever is possible to reduce the demands for energy - one of which is for producing various types of heating.
As a country we have historically suffered more from the cold in winter than from over-heating in the summer (so that aspect grabs our immediate attention), but that is no longer 100% the case - see in particular heat-related deaths in Europe over last decade.

My point, without turning this into an essay on climatology and the energy sector, is that the short-term drive is indeed to reduce energy consumption (which in the case of heating means measures like improved insulation).
BUT the longer-term vision is to transform the generation of energy into systems that rely on 'clean' sources ... and Heat-pumps are only one part of that equation.
For instance, they require a LOT of electricity to run ... so are only marginally green (despite the extra palaver and cost of manufacturing/installation) if they are hooked up to a source of green electricity (such as your own solar panels).

If air source heat pumps are only indirectly tackling the easier end of the objective (generating heat without the use of gas a source) whilst actually increasing overall energy consumption, then this is doing nothing to help the overarching objective of reducing the demands for energy!

They may be a short-term compromise between making things worse more slowly whilst retaining living conditions that are both healthy and comfortable - but, as we experience more periods of excessive natural heat, the same could be said for methods of cooling the home/office/wherever?

On the other hand, who said that logic would play any part in legislation that may have it's heart in the right place but is ultimately politically-driven!

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Replying to Hugo Fair:
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By Jason Croke
04th Apr 2022 16:20

I never thought I'd be writing to disagree with you Hugo, but I disagree that air source heat pumps are marginally green....depends on context....yes, they use electricity but they use it incredibly efficiently.

For every 1kwh of electricity, an air source heat pump can generate 3kwh of heat, whereas a gas boiler will generate about .9kwh for every 1kwh going in (90% efficient). Even if the electricity is generated using coal power plants, if everyone had air source heat pumps at 300% efficiency, then you're getting 3x energy from that electricity and so less carbon emissions because less electricity would be needed to be generated.

I know that is massively off-topic but bringing it back to VAT, I agree with you, the policy is to encourage a shift to greener technologies and so if certain air conditioning units qualify, then that's great, it means technology is advancing to offer alternatives, much the same way as the shift from petrol to electric has seen technology progress so that we have hybrid cars and fully electric cars sitting alongside petrol and diesel, for now.

The Jason household is electric in terms of cars/solar generation, still have a gas central heating system and that's next on my list, but might install a Tesla Powerwall/battery storage first and then do the air source heat pump. Nothing to do with spiralling costs of gas/electric, I've been working toward reducing carbon footprint for some years now as I'm a bit of a green nerd.

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Replying to Jason Croke:
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By Hugo Fair
04th Apr 2022 18:19

Thanks ... happy to stand corrected.
I knew I'd learn something interesting - "For every 1kwh of electricity, an air source heat pump can generate 3kwh of heat, whereas a gas boiler will generate about .9kwh for every 1kwh going in (90% efficient)."

If it wasn't for the fact that I know some of the boffins supposedly cooking up (sorry) apposite policies to get us out of this mess, I'd be suspicious of some of the figures being flung around - not by you - often without much context.

We have a local 'champion' whose house was fully retro-fitted with everything available - from industrial quantities of solar panels, a massive air source heat pump, various convertors to retain compatibility with his HW/CH equipment (other than the boiler), and substantial arrays of batteries under the staircase.

When I enquired about his knowledge of the despoliation caused by lithium mining (as one example) and the carbon-footprint of manufacturing/delivering materials to his house, he got upset ... and pointed out why he'd had to install so many panels & batteries.
You guessed it, govt policy (or rather Ofgem's price-cap - whereby the capped price per kWh for Electricity is 5x that for Gas)!

So, as always, cost comes back into the equation. Unless I can generate my own electricity (to feed my heat pump and anything else electrical) then I will be heavily penalised for switching from Gas ... and yet quotes for becoming truly self-sufficient increase my installation costs from £8-£10k to well over £25k.

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By Jason Croke
04th Apr 2022 12:07

Extract from supplier website "When it comes to heating the home will this also include air conditioning units similar to boiler systems and thermostats? Air conditioning units are covered because they are considered to be air source heat pumps by virtue of its technology and dual use."

It's the last two words "dual use" that interests me. I'm not an expert in air conditioning technology,. but they appear to be saying that their products have a dual use of cooling and heating akin to an air source heat pump.

I would then ask HOW does it heat? If it simply has a heating element like an old 2-bar electric heater, then that is not the same "technology" that air source pumps use to generate heat/cooling.

If the supplier does have a product that uses "similar technology" to air source heat pumps (ie, reverse process) and their product generates cooling and heating ("dual use"), then I can see how their product might meet the conditions, it will depend on the precise facts facts, as per what HMRC state in their current guidance, but I still think we have to be mindful of the historical guidance/stance to help draw a distinction and so as is often the case with VAT, the answer is likely to be on a case by case basis rather than a global catch all solution.

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By clark.hall
05th Apr 2022 09:28

Thanks for the considered replies, especially Jason's - understanding the history / context of the confusion helps. Generally I would also tend to be sceptical that Air Con units were ever intended to be included as ESM's. But... looks like we might find out soon enough:

My client has now provided a document from Building Engineering Services Association (BESA) claiming that VAT Notice 708/6 will be updated Friday 08/04/2022 as follows:
"paragraph 2.17 Air Source Heat Pumps
Air source heat pumps use the air as a source of heat. They absorb heat from the outside or surrounding air and transfer that into useable heat in the home for space and / or water heating.
Fixed air source heat pumps can be reversed so that they can draw heat from inside a building, thus providing cooling during the summer as well indoor heating for colder periods of the year.
Only air source heat pumps that are permanently fixed and are not portable / moveable qualify as energy-saving materials.
HMRC’s understanding is that most air conditioning units are air source heat pumps. However, in cases of doubt, deciding whether any particular product is to be treated as an air source heat pump will depend on the facts of the case."

The BESA document concludes:
The defining factor for VAT to be applied as zero rated in relation to paragraph 2.17 is that the air source heat pump can be used to heat the home.
In summary, provided the heat pump uses air as the heat source to heat the home it will qualify as an energy saving material, irrespective of whether it can also cool or not.

My take - it's rumour for now - but will be interesting to check. Hope this helps others.

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Replying to clark.hall:
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By Jason Croke
05th Apr 2022 10:20

Well that's a useful rumour and don't doubt it's legitimate, the proposal wording sounds like the sort of thing HMRC would write in their guidance.

So if I read that right, I totally get how the unit must be fixed, so that rules out those portable air conditioning units in offices where you lop a tube out the window.

It also suggests that air conditioning units are equivalent to air conditioning units - which answers your initial question - (but presumably the modern types that can both heat and cool), as was noted by Wanderer's post who noted that most modern air con units heat and cool.

So then we're still left with a bit of ambiguity, I think as per what I posted earlier, if the air con unit uses the same technology as an air source heat pump (ie, not a heating element but a reverse cooling process) then they would qualify and if most modern air con units operate that way (reverse process) then zero rating can be achieved.

The BESA conclusion is confusing though, they conclude that "provided the heat pump uses air as the heat source to heat the home it will qualify", but every kind of heater uses air to heat a room, those little blower fans underneath the desk, they use a heating element to heat air....BESA are saying as long as the thing uses air as the heat source it qualifies, so i think in trying to interpret the HMRC guidance, BESA has added another layer of confusion if taken at face value./read as a complete non-expert I could see "if the heat pump uses air to heat" could mean anything.....on saying that, I'm not an air conditioning expert and so perhaps the wording is more relevant for the audience...

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By Open all hours
05th Apr 2022 19:49

Simply hoping so on the basis that all this insulation makes properties far too hot in summer. Pleased to live behind 2 foot thick stone walls.

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Replying to Open all hours:
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By Hugo Fair
05th Apr 2022 20:12

I thought castles usually had plenty of ventilation up on the battlements?

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By john hextall
06th Apr 2022 10:00

There is no way that air conditioning units can be considered energy saving devices. They are amongst the most voracious consumers of electricity on the planet and should be taxed heavily for their contribution to global CO2 production. Anyone claiming reduced rate VAT on them will sooner or later come a cropper.

On the subject of air source heat pumps, everyone I know who has one tells me they consume large amounts of electricity and produce little or no heat so the suggestion they are 300% efficient is somewhat suspect. I realise that ground-source heat pumps can be very effective given adequate insulation and; that if your house is super-insulated the air source heat pump may contribute some heat, but in general terms, they seem to be a con that for some reason the government thinks will solve global warming.

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By Jason Croke
07th Apr 2022 10:08

Well, Clark.Hall was correct, HMRC have updated their guidance this morning and it is exactly as quoted here earlier in this thread.

https://www.gov.uk/guidance/vat-on-energy-saving-materials-and-heating-e...

2.18 Air source heat pumps
Air source heat pumps use the air as a source of heat. They absorb heat from the outside or surrounding air and transfer that into useable heat in the home for space or water heating, or both.

Fixed air source heat pumps can be reversed so that they can draw heat from inside a building, thus providing cooling during the summer as well as indoor heating for colder periods of the year.

Only air source heat pumps that are permanently fixed and are not portable or moveable qualify as energy-saving materials.

HMRC’s understanding is that most air conditioning units are air source heat pumps. However, in cases of doubt, deciding whether any particular product is to be treated as an air source heat pump will depend on the facts of each case.

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Replying to Jason Croke:
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By Hugo Fair
07th Apr 2022 10:40

Only on reading this (not being a VAT person) did I realise just how convoluted the rules are ... reasonably easy to understand and to follow the logic, but SO dependent on multiple factors!

Relating to your earlier post about energy efficiency, I was intrigued with one of the examples they provide:
"Another example is the installation of an air source heat pump together with new radiators and pipework in residential accommodation.
This is carried out as a single job and for a single price. Larger radiators and pipes are necessary because the air source heat pump operates at a lower temperature than a traditional gas boiler. The customer regards the work as one supply of an air source heat pump.
In this example, the installation of the new radiators and pipework are ancillary to the installation of the air source heat pump.
This single supply benefits from the zero rate in Great Britain or reduced rate in Northern Ireland (subject, in Northern Ireland, to one of the social policy conditions being satisfied or the 60% test being met)."

So, if the air source heat pump operates at a lower temperature than a traditional gas boiler, how does this translate into overall efficiency when heating the home?

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Replying to Jason Croke:
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By clark.hall
08th Apr 2022 12:07

Thanks Jason, think you may have enjoyed the conversation more than me! But, I've appreciated the help on this one.

So, to summarise, I conclude that from 1 Apr 2022 - 31 Mar 2027 Air-con units are considered ESM's and therefore zero-rated if:

-They're installed in a domestic (not commercial setting)
-They're supplied and installed by the seller
-They're fixed and not portable units
-They heat as well as cool (apparently you can no longer buy units that only cool)

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