After much confusion within the industry over the appropriate application of VAT on energy saving materials (ESM), it was announced on 21st February that The European Commission has decided to refer the United Kingdom to the EU Court of Justice over its reduction of VAT on the supply and installation of energy saving materials.
Under EU VAT rules, Member States may apply reduced VAT rates to the supply of goods and services used in the housing sector, so long as it is part of a social policy. Energy saving materials could be covered by this provision if the conditions are met (i.e. used for social policy purposes only in construction, renovation and alteration of housing).
It is believed that the UK has gone beyond what is permitted and broken the EU VAT rules. The UK has universally applied the reduction of VAT to energy saving materials without restricting it to a social policy. The UK has also linked the reduction of VAT on energy saving materials to the ‘Green Deal’ in order to help the UK Government achieve its overall objectives in the reduction of carbon emissions. If ruled unlawful the UK could face huge penalties.
John Thompson, APHC Ltd, Chief Executive commented “After much confusion within the industry over the application of reduced VAT to energy saving materials, this news could come as another blow to the industry. APHC strongly support the UK Government in its defence, as this could have considerable consequences to the renewable energy plumbing and heating market.”