Reduced rate VAT – Warning – EU Judgement of 4 June 2015

An EU court ruling of 4 June 2015 states that the UK cannot apply reduced rate VAT to the supply and installation of energy savings materials – except in the case of social housing.

Therefore, although the information below is correct now, it may change, or be adapted, sometime in the future. Therefore for any current domestic installations that comply with the information below it is likely that you will want to complete the installation quickly to ensure that the VAT rate is at 5%.

For future installations for someone who suffers VAT (and cannot reclaim it) it will be appropriate for them to know that there is a risk that the rate may rise from 5% to the standard rate of 20%. It seems unlikely that there will be any change to UK law before the 2016 Budget at the earliest, and that for any changes that do occur the legislation is unlikely to apply until after any change is announced.

Reduced rate VAT - 5% - applies on installation of Interseasonal Heat Transfer

Installation of any of the following energy saving materials in residential accommodation qualifies for the lower rate of VAT:

  • controls for central heating and hot water systems
  • draught insulation (eg around windows and doors)
  • insulation on walls, floors, ceilings, lofts, etc
  • solar panels
  • ground-source heat pumps (including ground works)
  • air-source heat pumps
  • wind turbines
  • water turbines
  • micro combined heat and power units
  • wood-fuelled boilers

The lower rate of VAT applies if the energy saving materials are installed and the work is done on a domestic dwelling.

The lower rate applies on any necessary extra work that needs to be done as part of the installation. For the installation of a ground source heat pump system this includes the heat pump, the ground loop, system controls and any other installation ancillary to the supply. Because a ground source heat pump installation provides heat at a lower temperature than a fossil fuel boiler there will usually be a need to increase the number or size of the radiators as part of the ancillary work or install underfloor heating. See Heat Emitter Guide.

Notes:

  • the reduced rate does not apply if you buy materials directly: it only applies if you buy an installation service (which includes the supply of materials)
  • the reduced rate only applies for an installation of these items (including ancillary items) to a domestic dwelling
  • if the installation is part of a wider supply, such as a new extension, then the reduced rate does not apply. This means that the reduced rate will only apply if the installation of energy saving materials is the dominant part of the supply.
  • if the installation is in a new building then the supply is zero-rated for VAT

This pages summarises advice given in HMRC VAT Notice 708/6 Energy-saving materials.

Renewable Heat Incentives are available on installation of Interseasonal Heat Transfer

Owners acquiring new IHT systems are eligible to receive Renewable Heat Incentive for the use of ground source energy and for heat generated by solar thermal systems for domestic hot water. The remaining heat generated by solar thermal systems is used in IHT systems to boost the temperature of the thermalbank: this greatly improves the efficiency of ground source energy for space heating in winter.

See RHI for domestic buildings.