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Further changes to VAT on energy-saving materials

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The zero rating of VAT for energy-saving materials has been subject to much change and this flux looks likely to continue.

13th Feb 2024
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The zero rate of VAT, announced in the Spring Budget 2022 and from 1 April 2022 until 31 March 2027, applies to the installation of certain specified energy-saving materials in (or in the curtilage of) residential accommodation in Great Britain. Then from May 2023, the zero rate also applied to Northern Ireland.

In the Spring Budget 2023, HMRC commenced a consultation on whether the zero rate should be extended further and HMRC has since published details of additional energy-saving materials that will apply from 1 February 2024.

Current position 

Notice 708/6 Energy Saving Materials (section 2.7) details what is covered by the zero rate (or reduced rate for Northern Ireland) and further details at section 2.11 onwards. 

The zero rate is driven by the installation of energy-saving materials (ESM), so where only materials are purchased, they will be standard rated – a home DIYer will therefore not benefit on purchasing materials but can see zero rating on costs associated with contractors installing the goods.

The more common ESM include controls for central heating, draught stripping, insulation, solar panels, ground- and air-source heat pumps, micro combined heat/power units and wood-fuelled boilers, and wind and water turbines.

Batteries are included

Prior to the February 2024 update, the installation of battery storage could be zero rated but only as part of an overall installation of a solar-power system, simply adding battery storage to an existing installation was not. But from 1 February 2024, the zero rate is extended to electrical battery storage that is retrofitted to a qualifying ESM. Also, installation of electrical battery storage as a standalone technology connected to the grid will also qualify for the zero rate of VAT. 

Other additions to the list of ESM will include water-source heat pumps and diverters retrofitted to existing ESM such as solar panel or wind turbine systems and, bringing up the rear, heat pump groundworks (although not covering all groundworks, it will permit those works that are integral to the installation of a ground-source heat pump).

Charities will benefit too

Historically, charities could benefit from the zero rating where the ESM were installed on a building intended for use solely for a relevant charitable purpose. This was withdrawn in 2013 due to EU legislation.

The zero-rating relief will be reinstated from 1 February 2024, which will allow qualifying charities to install ESM, the same as for domestic consumers. A charity qualifies for the zero rating where the property in which the installations take place is used other than in the course or furtherance of business.

In other words, charitable non-business activity triggers the zero rating. What is or isn’t charitable non-business can be a contentious matter itself, but village halls or similar are often capable of achieving the relief.

Making good 

As before, the installation of ESM may require ancillary works/supplies and where applicable, these can be zero rated too. The HMRC example is that in order to install loft insulation, it may be required to enlarge the loft hatch to get materials and labourers into the roof space. Such enlarging works would therefore quality for zero rating when done as part of an overall project of loft insulation.

Another example may be when installing air-source heat pumps, which may require new pipework and radiators. If done as one project, the whole can be zero rated, whereas if the customer was just replacing radiators first, without the installation of the heat pump, then the installation of radiators is not eligible, even if the radiators are heat-pump compliant.

Lack of savings for the consumer

There is plenty of evidence that zero rates/cuts in VAT rate do not automatically translate into savings for the consumer. It may be more likely that suppliers may use VAT savings as a marketing technique but not always pass on the full saving to the consumer.

The original proposal to extend the zero rate gives additional context. 

This zero rating is temporary, expiring 31 March 2027 but could be subject to extension or withdrawal depending on government strategy and notwithstanding a potential change of government.

Replies (9)

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By FactChecker
13th Feb 2024 13:54

Why oh why (in rhetorical tone) do they keep making it so complicated via the addition of sub-clauses instead of simplified re-writes? It is mostly good news (if a little late in the day), but it's not instantly intelligible to most householders.

For instance, why should the same material be standard-rated if bought by DIYer ... but zero-rated if bought (and thereby becoming part of an integral supply) by a professional installer? How does that aid the underlying policy (encouraging adoption of energy-saving methods in the housing stock)?

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Replying to FactChecker:
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By FactChecker
13th Feb 2024 14:00

But I did smile at Jason's dry comment that : "There is plenty of evidence that zero rates/cuts in VAT rate do not automatically translate into savings for the consumer."

Elder son was recently quoted for external insulation works, but installer said they didn't supply/erect the necessary scaffolding so he'd need to arrange it.
As well as being annoying (and sounding inefficient), son spotted that this would mean the scaffolding would now incur standard-rate VAT ... so asked installer 'to think again'.
However the response was: "Well we can do that if you want, but it will cost us as it's not a core service of ours - so we'd have to add a further 30% to the base cost of the scaffolding"!

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Replying to FactChecker:
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By FactChecker
13th Feb 2024 14:55

UPDATE:
Builder was/is under the impression that the scaffolding (supply/erection) is not zero-rated despite being an essential part of the project - which is to apply external insulation (via use of something called CorkSol which I believe is a specialist mix of cork granules and paint that is applied to pre-existing soundly rendered walls).

Without getting too specific (e.g. builder is convinced that the material qualifies for zero-rating and therefore so does its installation - and I'm not going to query that) ... would the scaffolding (if supplied by same builder as part of same project) not also be zero-rated - like the loft-hatch example quoted by Jason?

I ask because it sounds to me like their proposed 30% uplift is based on standard VAT plus an administration charge.

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By matchmade
14th Feb 2024 10:47

Lots of scope for debate here. For example, house insulation and ventilation are closely correlated: if you improve a property's insulation and draught-proof it, the reduced airflow will probably lead to problems with internal condensation and mould, especially if people persist in practices like drying clothes on radiators or maidens.

So, do improvements to a house's ventilation, like adding humidity-detecting extractor fans or even whole-house piped systems count as "ancillary works" that qualify as a zero-rated supply? Notice 708/6 Energy Saving Materials (section 2.5.1 Single supplies) suggest they could be, if installed as part of a single supply:

"A single supply is where one element of the supply is the principal element
to which all other elements are ancillary. An ancillary element does not
constitute, for the customer, an aim in itself, but is a better means of enjoying
the principal supply."

So although a ventilation system is not an essential component of the insulation measures, they could be sold together as mutually-dependent linked components in a whole-house solution. If "the customer perceives that what they are getting is a single supply", then it sounds like the whole package could be zero-rated.

So the next step: what about zero-rating of replacement windows, installed at the same time as external or internal wall insulation, plus a ventilation system, floor and loft insulation, draught-proofing etc? The SAP system used by energy assessors to work out EPCs recommends that if you are going to the expense of installing wall and other insulation, you should replace the windows too, to create a full sealed "envelope".

For whole-house property renovators, we are getting towards zero-rated new-build territory here, but without the restriction that the property has to be sold within two years, otherwise it loses its 0% entitlement.

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Replying to matchmade:
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By Heating_installer
15th Feb 2024 14:45

The guidance used to give some indication of allowable percentage of total job cost that may be allowed as ancillary works, seems that has been removed.
It would seem common sense that if the 'ancillaries' constitute more than 50% of the job cost that they are by definition not ancillary but constitute the greater part of the works and render the entire job standard rated. Again common sense would suggest nudging the 50% would be inviting unwanted interest from HMRC and
It is really not difficult to arrange an installer to invoice works as different jobs 'commissioned at different times' as a workaround (as described in 2.5.2 final para of 708/6) on larger projects I have had several VAT inspections (My mix of regular and renewables work threw up many odd overall rates on turnover with regular inspections being the result) where the inspector has looked at exactly this situation and been quite happy with things!

It used to be the case that ESM materials costs could not exceed 60% of the supply and install job cost - this was dropped as a requirement when the previous changes took place but would be an indicator of expected balance of costs ie. no diyer buying materials and charging themselves a nominal amount to 'install'

It has been pointed out that these cost savings are often not passed on to the customer. This is not of concern to HMG as the principle purpose of this scheme and others such as FiT, RHI etc. is to build an installer base capable of offering the technologies and it then becoming the norm for the installer as *most* customers are (happily) steered into what the installer is comfortable working with, thereby moving the trades vernacular along, something that is notoriously difficult in an industry where many of the participants are conservative and/or not academically gifted.
This reason is also behind some of the, seemingly, inconsistent exclusions from the list of ESMs

On a related subject I see there are rumours that the self defeating CHMM is to be cancelled, if so another government energy policy fubar narrowly averted!

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Replying to Heating_installer:
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By matchmade
16th Feb 2024 15:37

The CHMM came out of the same logic that forces car manufacturers to sell a steadily-increasing X% of EVs, driving them to improve their processes and find a way to drop the hefty cost of EVs, probably by increasing the price of ICE cars. Since the poor long-suffering consumer can afford neither and there's very little second-market for EVs, car manufacturers are in a tough position.

If the CHMM is cancelled, it will come back in a slightly different guise if Labour is elected. Its policies (the very few there are) and attitudes expressed by shadow ministers (if they ever say anything) and the usual media and charity flag-wavers suggest Labour is going to be full of nudge and shove to make consumers do what has been decided is good for them. Unfortunately the no-carrot, all-stick approach - unless you pass the inevitable means test and social virtue test - can't get around the problem that heat pumps are horribly expensive, once you factor in all the insulation and ventilation works that is needed, particularly in period properties. The cost of properly insulating a typical solid-wall 3-bed house, plus redecoration, mechanical ventilation, a heat pump, solar panels and a battery (to run a heat pump and EV) is in the range £60-80,000, depending on the size of the house. The payback period from energy savings is probably about 30 years. I can't see many people being able to afford this out of their income and savings, on top of living costs, paying down the mortgage and so on, so there needs to be some serious thinking about ways to help out.

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By simAWeb
14th Feb 2024 11:35

As others have said this is getting complicated. Trying to sort out a wee village hall which needs external wall insulation, is rainscreen/cladding/ render part of this or do we need to separate out? Also need floor insulation but we need to lift boards, insulate and replace boards, is this covered as a lot of the cost will be lifting an replacing boards? For solar panels need to do some roof work (strengthen) is this ancillary for solar? And the list goes on. Given the example it looks like we need to split the work into small portions and have lots of different contracts (thermostatic valve example). Or do we simply accept that everything is standard rated, we cannot afford to get it wrong.

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Replying to simAWeb:
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By matchmade
15th Feb 2024 14:05

I would have said the rainscreen (cladding, brick slips, render etc) is an integral part of an EWI system: you can't have your wall insulation materials exposed to the elements and many degrade in sunlight too. So the rainscreen has to be zero-rated. For peace of mind the contractor should be asked to specify the system and its integral elements (including the scaffolding!). And/or write early to HMRC and get a written opinion.

Ditto floor insulation: the labour to lift and replace floorboards is surely an essential part of the scheme of work, because said labour needs to be able to access the underfloor location, both to insulate the boards underneath and the points where the support timbers enter the walls, which are probably thermal bridges. This matches HMRC's example mentioned above: works to enlarge a loft hatch, even though it could be called an "improvement", can be zero-rated because the work is essential for delivery of the principal items, i.e. the loft insulation.

Ditto strengthening the roof for solar panels: this is surely essential for the effective functioning of the overall project! Otherwise the panels are going to fall through the roof and maybe kill someone. For peace of mind, if you haven't done this already, it might be useful to pay a structural engineer £500 or so for a report calculating the need for strengthening work and specifying the timber or steel materials and installation method. Alternatively, he or she might recommend replacing the original concrete roof tiles, say, with lighter ones: this will reduce the loading on the roof structure, perhaps sufficient to allow you to safely add the solar panels, and the new tiles could then be zero-rated too. If the roof surface could do with replacing anyway, this would be a useful way to kill two birds with one stone.

What couldn't be zero-rated? Well, if your clients indulge in mission creep and start specifying a new kitchen, a rewire and so on, those will need to be full-rated. Similarly let's say they propose adding new lighting in the loft - yes, that would make life easier for the insulation workers, but it's not essential: the workers can use portable lights instead.

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Replying to matchmade:
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By Heating_installer
15th Feb 2024 17:18

I would agree that EWI applied with typical render system or brick slips bonded to the insulation would be zero rated, however if you are after something more exotic that will require a support structure beyond attachment to the face of the insulation (timber boards or stone facing etc) then you are moving into dangerous territory.

As regards the flooring I would look at that in light of the old 60/40 rule, if the labour for the carpentry work is going to be significantly over 40% of the job then I would seek HMRC clarification.

Solar panels - if you are using an MCS registered installer (and you would be bonkers not to!) then part of their required remit is the soundness of the structure and the support system (the factors involved far exceed existing dead loads) for the applied loads. They must include in their supply the necessary opinion from qualified structural engineers and/or specialist advice from the manufacturers of the panel mounting systems.
If any consequential improvements are substantial requiring other contractors and or specialist structural professionals the work will be far beyond what is considered ancillary and most PV firms will ask you to have it completed by others before they start.
Re roofing involving replacing the roof covering will never be justified as ancillary work.

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