Fight goes on over VAT reduction

The UK Treasury has confirmed it will fight to continue to charge a lower rate of VAT on certain energy-saving materials.

In June of this year, the EU Commission said if the UK did not move to raise VAT from 5% to 20% on energy efficiency goods and services within two months, it may refer the matter to the European Court of Justice. Exempted products include insulation, controls for central heating and hot water systems, solar panels, and heat pumps.

HMRC has said the EU Commission has commenced proceedings on three grounds:

• That there is no specific provision in EU law to allow a reduced rate for ESM;

• That the EU provisions on which the UK relies as the legal basis for the reduced rate (Category (10) of Annex III to the Principal VAT Directive) only apply where introduced 'as part of a social policy', whereas the UK's relief for ESM has been introduced as part of an environmental policy;

• That the UK's relief is too wide as the EU provisions on which it relies apply only to housing, which does not include buildings used for a relevant charitable purpose.

To read the brief click here.

While the government will not back down on demands from Brussels to impose the full rate of VAT on 'green goods' installed in homes, it has "reluctantly accepted" charitable buildings will need to pay the standard rate from next August, and has already made provision for it in this year's Budget.

What will this mean for programmes like the Green Deal, where low rates of VAT were expected to play a significant role in ensuring monthly repayments for energy efficiency measures did not cost more than the resulting energy savings delivered?

I would be interested to hear your views.