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VAT zero ratings may not benefit consumers

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The extension of VAT zero ratings for energy-saving materials and period underwear has been hailed as helping consumers but who will really benefit?

5th Dec 2023
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Two announcements included in the Autumn Statement have been trumpeted as being a great win for the consumer, but how much will these changes actually impact them? 

The first was a commitment to remove VAT on reusable period underwear, known as period pants, from 1 January 2024. Other women’s sanitary products were zero rated from 1 January 2021, but “protective briefs” were specifically excluded from the relief.

This follows a reduction in VAT on the installation of energy-saving materials from 5% to 0% with effect from April 2022, or May 2023 if you are in Northern Ireland.

Tampon tax

When the rate for sanitary products was reduced from 5% to 0% in 2021, Tax Policy Associates carried out a detailed review of the impact of the change on the prices charged to the end consumer.

While it is hard to pin down price changes to specific reasons, the report concluded that, at best, 20% of the tax saving was passed on to the consumer. The rest remained with the retailer, presumably increasing their profit margin.

Period pants

According to period pant supplier WUKA, tampons, pads and panty liners and their packaging generate more than 200,000 tonnes of waste per year. Disposable pads are made up of up to 90% plastic, which is the equivalent of four plastic bags. 

It is clear that period pants are a much more sustainable option, and so a lot of suppliers were surprised when they were excluded from the zero rating from 1 January 2021.

A petition organised by WUKA to challenge this treatment garnered over 36,000 signatures, and Marks & Spencer joined the fight with a #saypantstotax campaign.

As the new zero rating does not start until 1 January 2024, it is impossible to tell yet, whether the reduction in VAT will be passed onto consumers. The report on tampon tax would suggest not, but the high-profile campaigning by WUKA and M&S surely suggests that they, at least, will have to reduce their prices as a result.

I suspect other suppliers may not be as quick to adjust their selling price. A quick check online of four different suppliers does not produce any mention of VAT or its impact.

Energy-saving materials

VAT on the installation of energy-saving materials (ESMs) is zero rated until 31 March 2027, when it is slated to return to 5%. Whether that increase will actually happen remains to be seen. 

When then-Chancellor Rishi Sunak announced the change in the 2022 Spring Statement, he said: “I can announce that for the next five years, homeowners having materials such as solar panels, heat pumps and insulation installed will no longer pay 5% VAT; they will pay zero.”

That certainly makes it sound as if there is an expectation that the VAT reduction will be passed on to the end customer.

The tax impact notice that was published in March 2022 included a section headed “Policy objective”, which said: “The measure is intended to incentivise the take-up of ESMs in line with the government’s net-zero objectives.”

Again, that would seem to suggest that there is an expectation that more people will buy ESMs as a result of the policy change, presumably because it will cost them less.

Price changes for ESMs aren’t as readily available to check as they are for tampons, as installation of ESMs is much more subjective. The price will depend on the location, the size, the fitter’s experience, and a host of other factors.

I suspect that the VAT saving is not passed on to the customers, but does that matter?

Reason for zero rating

When it comes to the zero rating of sanitary products, I think we would all agree that the intention of the reduction in VAT was so that the end customer would pay less. The retailer was already able to recover all the VAT on their costs, the output VAT on the selling price is collected by them and passed directly to HMRC, so why should they benefit from the reduction rather than the customer? It just feels wrong.

With the zero rating of ESMs, however, I am less sure. All of the publicity around the introduction of the zero rate does definitely suggest that the original intention was that the VAT saving should be passed on to the customer. But if it is not passed on to the customer, who benefits? In this case, it would be the suppliers of the ESMs. That is an industry that we should be supporting, so perhaps we need to view this zero rating as an indirect way of subsidising the industry and helping to save the planet.

Replies (7)

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By vstrad
06th Dec 2023 10:46

This is a naive way of looking at taxation, Hilary. All tax ends up being paid by Joe Public, in one way or another. That may be directly through retail prices, or it may be through the ability or inability of companies to pay higher wages, avoid redundancies or pay dividends etc. Hence all tax reductions benefit Joe Public too.

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Replying to vstrad:
RLI
By lionofludesch
06th Dec 2023 12:55

Naive maybe.

But chocolate Nesquik should be cheaper than banana or strawberry Nesquik. It isn't and that reflects the cynicism of the supermarkets.

That said, I've always maintained that VAT is a tax on retailers and others who deal directly with Joe Public.

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By zebaa
06th Dec 2023 10:57

In practice the reduced rate of vat on energy saving materials is often NOT applied, because of the complexity of the vat scheme. My experience is that if you want something to work then it must be simple. Reduced rate vat on bits here and there make in NOT simple. Same applies to the whole ‘green improvements’ type of thing. It’s a mistake made by government over and over again. Very frustrating.

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Ivor Windybottom
By Ivor Windybottom
06th Dec 2023 17:53

Using VAT as a lever to change behaviour is a very blunt tool. A wide reduction may partly help the public, but anything more specific appears to have a more limited effect.

The average person may believe the politician sound-bites that a VAT cut helps them, but it seems (some) politicians understand that VAT is a tax on business, hence, for example, the "eat out to help out" VAT scheme was to support businesses rather than help the public.

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By richsolar
06th Feb 2024 10:25

Hi, i appreacite this post is old but hoping for some assistance.
I work for a Solar PV contractor and we are in discussion with a customer who is fighting his corner that VAT is not applicable to his installation. Solar PV products are 0% rated for domestic customers but the property we are installing to is a HMO. Can anyone confirm that a HMO would still count as a domestic project but is being financed by a private company. Help please :)

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By richsolar
06th Feb 2024 10:25

Hi, i appreacite this post is old but hoping for some assistance.
I work for a Solar PV contractor and we are in discussion with a customer who is fighting his corner that VAT is not applicable to his installation. Solar PV products are 0% rated for domestic customers but the property we are installing to is a HMO. Can anyone confirm that a HMO would still count as a domestic project but is being financed by a private company. Help please :)

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Replying to richsolar:
RLI
By lionofludesch
06th Feb 2024 12:28

richsolar wrote:

Hi, i appreacite this post is old but hoping for some assistance.
I work for a Solar PV contractor and we are in discussion with a customer who is fighting his corner that VAT is not applicable to his installation. Solar PV products are 0% rated for domestic customers but the property we are installing to is a HMO. Can anyone confirm that a HMO would still count as a domestic project but is being financed by a private company. Help please :)

You'll get a better response if you start your own thread.

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