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Heat pumps and other energy saving materials benefit from VAT cut in April 2022
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VAT 5% rate on energy saving materials cut to zero

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The Chancellor’s sprang a VAT surprise in his Spring Statement with an extension of the zero-rate to the installation of energy saving materials, according to Vatadvice.org’s Les Howard.

23rd Mar 2022
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VAT on energy-saving equipment and materials such as solar panels, heat pumps and roof insulation will be cut from 5% to zero from 1 April in a surprise tweak announced in the Chancellor’s Spring Statement.

Turning to the substance of the change, Howard explained that a new Group 23 to the Zero Rate Schedule will be inserted to take effect from 1 April 2022 until 31 March 2027. Supplies covered by the new zero-rate will revert to the reduced rate from 1 April 2027.

The supplies that can attract the reduced rate within residential accommodation include insulation of all sorts; central heating and hot water system controls; ground- and air-source heatpumps and boilers fuelled by “vegetal matter”.

This update will zero-rate the installation of energy saving materials in domestic properties and “relevant residential purpose” buildings, such as care homes. “The list of energy saving materials is pretty broad. But contractors will need to ensure that products they install are covered by the new provisions,” Howard explained.

“I did note that ‘relevant charitable purpose’ buildings are not included in the new legislation, even though these were removed from the reduced rate provisions in 2013, as I recall,” Howard said. “This is a lost opportunity, especially since such buildings do not benefit from the domestic fuel price cap. The Chancellor could have provided a real benefit to the charity sector without enormous cost to the Treasury.”

The zero rate does not apply if you live in Northern Ireland. The reduced rate for installation of energy saving materials continues to apply for properties in Northern Ireland. Until the discrepancy is resolved, the Chancellor said the government would make an appropriate adjustment to the regional grant formula.

‘No longer constrained by EU’

In a subtle rhetorical twist during his speech, the Chancellor acknowledged that the relief on energy-saving materials used to be more generous until a 2019 European Court of Justice ruling restricted eligibility.

In a line crafted for leavers on his backbenches and in the press gallery, Sunak continued: “But…thanks to Brexit…we’re no longer constrained by EU law.

“We’ll also reverse the EU’s decision to take wind and water turbines out of scope – and zero rate them as well. And we’ll abolish all the red tape imposed on us by the EU.”

Green commentators rushed to explain that EU member states could exempt energy-saving equipment and materials from VAT and were already doing so.

In somewhat more measured tones, Les Howard noted the Chancellor’s dig at the EU, but added: “Since the EU exit, the UK could have opted to re-introduce the reduced rate at any time in the past 15 months.”

Blick Rothenberg VAT partner Alan Pearce commented: “The strict limitations introduced by the EU will [be] scrapped. These meant that the VAT relief was often limited to certain residential properties and to eligible persons such as those in receipt of benefits and the over 60s.”

Pearce continued: “It will be interesting to see if the withdrawal of ‘red tape’ will also extend to larger refurbishment projects that include an element of eligible energy saving material.

“At present, the relief only applies if the work being undertaken is a specific contract for the installation of eligible energy saving material. Where supplied as part of large refurbishment or extension to a property (so that the energy saving materials was not the main supply) the 5% would not have applied. Therefore, the detailed legislation for the new zero rate will need to be closely scrutinised to see if this limitation has also been scrapped.”

Discouraging precedents

Looking back at a string of previous tax tribunal decisions on the reduced rate for installation of energy saving materials, Les Howard voiced major concern over the way HMRC applies such reliefs.

“”As early as 2018, following the first tier decision in Safeguard Europe Ltd, HMRC issued VAT Brief 9/2018 stating that the installation of certain damp proofing products fell outside the definition of energy saving materials,” said Howard.

“Similarly, the upper tier in Wetheralds denied full reduced rate for solid roof systems which incorporated environmental elements. These cases all indicate an approach by HMRC that sought to effectively restrict the application of the reduced rate. Should the same approach be applied to supplies made after 31 March, this will undermine the intention of this new relief.”

Spring Statement coverage brought to you in association with Accounting Excellence.

2022 Spring Statement coverage in association with Accounting Excellence Awards

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By djbrown
24th Mar 2022 14:47

There is a page on HMRC website, explaining the basics of the change. At the bottom of the page there is a link, to contact Patrick Wilson.

I tried and even before I had completed the title of the email, I had a message flash up: "We won't be able to deliver this message to [email protected] because the email address is no longer valid.

HMRC at its best...

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