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energy saving concept image | accountingweb | Consultation on VAT on energy saving materials

HMRC seeks feedback on VAT relief for ESM


In a new consultation document, HMRC is calling for feedback on the current VAT reliefs available for energy-saving materials, including the option to remove items from the list.

5th May 2023
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HMRC has launched a consultation process in an attempt to improve the take-up of energy-saving materials (ESM) and progress towards their stated goal of a 15% reduction in final energy consumption from buildings and industries by 2030.

This is currently taking the form of a call for evidence, where taxpayers and interested parties can comment on the existing rules and suggest how they could be improved.

The story so far

ESM were initially given preferential treatment from 1 July 1998 where, under certain conditions, they qualified for the reduced rate of VAT. Over the following years the conditions and criteria have altered to include/remove items, specify how the supply can be funded, and to include/remove charities from the list of eligible entities. 

As things currently stand, the installation of qualifying ESM in a residential property can receive preferential treatment. For taxpayers in Northern Ireland, the reduced rate potentially applied until 30 April 2023, with supplies after that date potentially being zero rated until 31 March 2027.  For the remainder of the UK, the zero rate potentially applies between 1 April 2022 and 31 March 2027.

Call for evidence

As the ESM industry is relatively fluid, with technological changes and new ESM emerging, HMRC are asking interested parties to let them know of any other technologies they should include under the ESM umbrella. This feedback is to be via a series of questions.

In order to be considered, any suggestions must meet three objectives:

  1. They must improve energy efficiency and reduce carbon emissions.
  2. They must be cost-effective.
  3. They must be aligned with wider VAT principles.

A greener country

To be said to improve energy efficiency, the overarching aim must be to reduce the use of fossil fuels for the production of energy. This could be by the ESM producing energy itself (such as solar panels), or by making a property more efficient with its use of energy (such as insulation).

This will not include items primarily designed for another purpose, even if they are also designed to be energy efficient (such as washing machines).

Any new ESM must be cost-effective – any changes that will have minimal environmental impact but significant costs are unlikely to be accepted.

Finally, new measures must be in line with existing VAT principles and must not cause confusion. HMRC gives the example of an ESM being installed as part of a larger supply, with the ESM element receiving its own treatment. HMRC considers this would cause uncertainty with other supplies involving multiple components.

Battery storage 

Following several taxpayer requests, HMRC is especially interested as to whether battery storage devices should count as ESM, either as a stand-alone item or when connected to other ESM. This would particularly benefit any energy-producing ESM that do not create steady amounts of electricity, such as solar panels and wind turbines.

Charities excluded

Another specific area where HMRC is seeking feedback is in relation to charities. Charities had been included as eligible entities in the UK from April 2000. However, in August 2013 the European Commission deemed this treatment incompatible with EU law and the UK was forced to exclude charitable buildings from the relief.

Post Brexit, the UK is free to reverse this decision and allow charities to once again benefit from the reduced VAT treatment. HMRC’s questions seem to imply it is expecting charities, rather than businesses/individuals, to respond to this area. However, I don’t see why non-charitable organisations should not also respond on behalf of a charity or charities if they so wish.

Off the list

Aside from the specific areas above, HMRC is interested in more general comments and suggestions to make the ESM-related relief more effective.

Interestingly, HMRC is also inviting taxpayers to suggest items that currently benefit from the relief, but should be removed from the list of qualifying items. While it is a logical question to ask, it is perhaps not one that will receive many responses, as who wants to volunteer to pay more VAT?

Full consultation document

In the full consultation document, HMRC is asking for responses by 31 May 2023, either via email or post.

This is a good opportunity not only for businesses in the ESM industry to have their voices heard, but also for individuals who are perhaps planning to add ESM items to their homes and would rather not be charged VAT. 

It also occurs to me that HMRC’s suggestion that there may be items to remove could be a good opportunity for a business in one ESM industry to thin out the competition in another, but hopefully, I am just being cynical.

Replies (1)

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By Hugo Fair
05th May 2023 17:37

If BEIS (or whatever they're now called) can't work out the answers - in terms of which materials do or do not support the policy objectives for which they are responsible - then why are HMRC involved (let alone soliciting suggestions/claims from those with vested interests).

I know the govt isn't keen on the concept of accountability, but they have the advisers / they make the policies / they draft the legislation ... surely it's not beyond their capabilities to complete the jigsaw?

Thanks (3)