Policy paper

The Value Added Tax (Installation of Energy-Saving Materials) Order 2022

Published 23 March 2022

Applies to England, Scotland and Wales

Who is likely to be affected

Businesses that provide and install energy-saving materials (ESMs) and customers who have the ESMs installed in England and Wales and Scotland.

General description of the measure

This measure introduces a time-limited zero-rate of VAT for the installation of certain types of energy saving materials (ESMs) and reverses Court of Justice of the European Union derived legislative changes introduced in 2019, which narrowed the scope of the previous relief, for installations in residential accommodation in Great Britain. The zero-rate will be available for a period of 5 years and will then revert to the 5% reduced rate of VAT. The measure permanently removes the social policy conditions and the 60% test which businesses were required to consider determining the VAT liability of ESM installations prior to these changes and brings wind and water turbines back into scope of the relief.

In Northern Ireland, the list of qualifying goods and rate of VAT due on installations will remain unchanged. The Northern Ireland Executive will receive a Barnett share of the value of the relief until it can be introduced UK-wide.

Policy objective

This measure expands the VAT relief for ESMs available for domestic installations in Great Britain and reverses a Court of Justice of the European Union ruling that restricted the application of VAT relief on ESMs. The list of qualifying ESMs will be expanded to include additional technologies and the complex eligibility conditions have also been removed. The amount of relief available will also be increased through the introduction of a zero rate for the installation of ESMs in Great Britain. The measure is intended to incentivise the take-up of ESMs in line with the government’s net zero objectives

Background to the measure

The UK implemented changes required as result of infraction proceedings (European Commission v United Kingdom C-161/14) in 2019, from then reduced rating of installations of ESMs was limited to supplies to individuals who met certain social conditions. If these conditions did not apply, businesses were required to calculate the value of the goods and service elements individually. The relief would only apply if the service element accounted for over 60% of the total cost of the installation. The UK was also required to exclude wind and water turbines from the list of qualifying ESMs.

Following the UK’s withdrawal from the European Union, and subject to the Northern Ireland Protocol, the UK is no longer bound by the results of the infraction proceedings. The government is therefore introducing a permanent reversal of the 2019 changes along with introducing a 5-year zero rate to the installation of ESMs in residential properties in Great Britain.

Businesses have requested the reversal of the 2019 changes following UK withdrawal from the European Union to incentivise the take-up of ESMs in line with the government’s net zero objectives.

Detailed proposal

Operative date

This measure will take affect from 1 April 2022.

Current law

Group 2 of Schedule 7A to the Value Added Tax Act 1994 (VATA) (‘Group 2’) permits the reduced rate of VAT to apply to the installation of ESMs in residential accommodation when certain “social policy conditions” are satisfied (supplies to persons aged 60 or over or in receipt of certain benefits, housing associations or installations in accommodation used solely for a relevant residential purpose) or where the cost of the ESM does not exceed 60% of the total value of the supply (“the 60% test”). If the cost of the ESM exceeds 60% only the labour cost element qualifies for the reduced rate (with the materials standard rated).

Sections 29A (3) and 96(9) of VATA provide power for HM Treasury to make an order to amend Schedule 7A. Sections 30(4) and 96 (9) provide power for HM Treasury to make an order to amend Schedule 8.

Proposed revisions

The changes will reverse the 2019 legislative changes and widen the scope of the relief as set out below for installations of ESMs in Great Britain:

• The relief will no longer be restricted by the social policy conditions or the 60% test
• Wind and water turbines will be added back to the list of ESMs
• A temporary zero rate will be introduced with effect from 1 April 2022 until 31 March 2027
• Unless the government introduces further legislation to extend the period of the zero rate, the installation of ESMs will revert back to the 5% reduced rate from 1 April 2027

Summary of impacts

Exchequer impact (£m)

2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
0	-45	-50	-60	-60	-65

These figures are set out in Table 3.1 of Spring Statement 2022 and have been certified by the Office for Budget Responsibility (OBR). More details can be found in the policy costings document published alongside Spring Statement 2022.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The terms used in this section are defined in line with the OBR’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

This measure will positively impact individuals through lower prices charged by ESM installers, subject to the degree to which these businesses pass the VAT savings on to their customers. There is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a positive impact on businesses in Great Britain that make supplies of installations of ESMs in residential properties and individuals and organisations in Great Britain that purchase them. The changes will benefit businesses that install ESMs as they will no longer need to consider the social policy conditions or perform calculations to determine whether or not the installation qualifies for the relief. For a time-limited period, they will also no longer be required to charge VAT but will still be able to recover input tax in relation to these supplies. In so far as this VAT saving is passed on to consumers, it should boost demand for the installation of ESMs. One off costs will include familiarisation with the change and are expected to be negligible. There are not expected to be any continuing costs.

Continuing savings could include businesses no longer having to assess the proportion of materials provided and having a single rate apply to all supplies and are expected to be significant.

This measure is not expected to impact civil society organisations.

Customer experience is expected to remain broadly the same as it does not alter how businesses or civil society organisations interact with HMRC.

Operational impact (£m) (HMRC or other)

HMRC may initially incur increased costs administering the new rules. Further work is ongoing to quantify these costs. Guidance on the changes will be published shortly.

Other impacts

The measure is intended to encourage greater take-up of ESMs and is therefore expected to contribute to the government’s net zero targets in a positive way.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Patrick Wilson on email: [email protected].

Declaration

The Rt. Hon. Lucy Frazer QC MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.