Consider acting now to take advantage of a potential rise in the VAT of energy saving materials

The European Court of Justice (ECJ) has found that the UK VAT treatment on the installation of energy saving materials is in conflict with EU law, which may result in much higher costs for UK customers.

At present in the UK the purchase and installation of energy saving materials, including insulation, solar panels and wood fuelled boilers are subject to VAT at 5%. The 5% rate applies to this service when installed in residential accommodation; ‘residential’ in this case has a fairly broad definition.

Bear in mind that the purchase of energy saving materials alone is always subject to VAT at the standard rate – 20%.

The ECJ ruled that the HMRC has been offering the reduced rate of VAT too widely and should the reduced rate be considered a ‘social policy’ then it cannot be given to all members of society equally.

The outcome of this ruling is expected to say that the only members of society who should be given the VAT relief at 5% would be social housing tenants. If true, this will impact among others such as owner-occupier consumers, housing associations, charities and not-for-profit organisations. These would now suffer VAT at 20% and would be unable to recover VAT on underlying costs.

In addition, the ECJ have cast potential doubt over whether the reduced rate of VAT would be further restricted to supplies only when made in conjunction with a renovation or alteration of housing to be consistent with EU law.

To put this into monetary terms, the average cost of installing solar panels is currently £5000 + £250 VAT. If the changes go ahead next year, the same service could potentially cost £5000 + £1000 VAT, an extra £750 cost.

This is an unwelcome ruling for a Government who firstly, used the reduced rate of VAT as an incentive for people to install energy saving materials in their homes and secondly, did not intend to change the scope of VAT rates as part of their manifesto. The promotion of energy saving materials remains important for the Government; however it is unclear how it may have to react to these changes. It is possible that they may offer extra grants to cover the VAT cost, but nothing is certain.


For further information about this subject or to discuss VAT in general, please contact Nick Boaz or – 01904 464100