VAT Change to Impact on Home Improvements
With summer approaching, the thought of installing energy saving materials in your home may be the last thing on your mind. A proposed VAT change provides only a small window of opportunity. Work that is carried out after 31 July 2016 but which has either been paid for by that date, or at least subject to a contract signed by that date, is not to be affected by a proposed VAT increase on some energy saving materials.
Most home improvement work already attracts a VAT charge of 20 % (the standard rate of VAT). An exception is work installing energy saving materials, which attracts a VAT charge of 5% (the reduced rate of VAT). It is proposed that this VAT relief will be less widely available after 31 July 2016. There are two elements to the VAT change, both of which are proposed to take effect from 1 August 2016.
Firstly, it is proposed that the reduced rate of VAT will cease to apply to the installation of solar panels, water turbines and wind turbines. Currently the reduced rate applies to the cost of installing these items, including the cost of the items, when supplied by the installation business. To put this into context, if the VAT exclusive price of the materials and installation is £20,000, the proposed legislation will result in the VAT inclusive price increasing from £21,000 to £24,000 as a result of the VAT rate increasing from 5% to 20%.
Currently the reduced rate applies to the cost of energy saving materials as well as the cost of installing them, providing the materials are supplied by the business that installs them rather than being bought separately by the home owner.
The second element to the change in VAT law is that homeowners (except those who are at least 60 years old or in receipt of certain benefits) will see an increase in VAT (from 5% to 20%) on the cost of materials supplied by the installer if the cost of the materials exceeds the installation cost. The materials affected by this change are:
- insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings;
- draught stripping for windows and doors;
- central heating system controls (including thermostatic radiator valves);
- hot water system controls;
- ground source heat pumps;
- air source heat pumps;
- micro combined heat and power units;
- boilers designed to be fuelled solely by wood, straw or similar vegetal matter.
It is proposed that the items in this list of energy saving materials will only be affected by the proposed VAT change if the cost of the items exceeds the cost of installing them. The practical implications of this are interesting. For example, what is the VAT treatment when, as often happens, draught stripping for windows is installed at the same time as new windows? HM Revenue & Customs (HMRC) has previously taken the approach that in these circumstances the entire cost is subject to VAT at the standard rate. This approach has been successfully challenged.
In cases that were heard by the First Tier Tribunal in 2014 the Tribunal decided that, providing the cost relating to the draught stripping was invoiced separately from the cost relating to the new windows, or at least shown as a separate item on the invoice, the reduced rate of VAT applied to the cost relating to the draught stripping. From 1 August 2016 installers of energy saving materials will need to be even more careful about accurately analysing and separately identifying various costs on invoices.