The final price paid by consumers for measures which save energy and reduce emissions could be significantly increased by proposals from the Government to increase the VAT rate on energy efficient and low carbon solutions for homes.
Currently the VAT applied to energy efficiency measures such as insulation and low carbon heating technologies like heat pumps, biomass boilers and micro combined heat and power, is at a reduced rate of 5%. Under the new rules proposed to be implemented this October, the reduced rate of VAT will no longer apply to wind or water turbines. For other measures such as insulation and low carbon heating the reduced rate would only remain available to those who meet a ‘social policy test’ (60 years or over and in receipt of benefits or a ‘relevant housing association’).
For all others, the reduced rate will remain only when the value of the materials does not exceed 60% of the consumer cost (excluding VAT) of installing the energy saving measure. When the materials cost is a ‘significant’ (proposed as 60%) part of the total cost (excluding VAT) then the installation costs would have a 5% VAT rate – but the more significant capital cost would now attract VAT at 20%.
The proposal means the final price paid by consumers could be significantly increased and this could discourage the uptake of solutions which are key for making our homes energy efficient and low carbon in order to meet our climate change targets.
Industry associations, including the Sustainable Energy Association, have written a joint letter to Finance Secretary, Mel Stride, and Minister for State for Energy and Climate Change, Claire Perry, calling for the proposals to be scrapped or failing this for the threshold for material costs to be raised.
Commenting on the proposed changes, Lesley Rudd, Chief Executive of the Sustainable Energy Association said:
“I spent two years successfully campaigning for a reduction of the VAT rate on energy efficiency measures almost 15 years ago. The basis of the campaign was that when fuels such as coal and gas attract 5% VAT, it is wrong to impose 20% VAT on solutions which save energy and reduce emissions.
“It is particularly disappointing, therefore, that 15 years later when people finally seem to be waking up to the impact of climate change, the VAT on energy saving and low carbon technologies is to be increased. Whilst the policy change was not instigated by the UK Government, but by an EU ruling 4 years ago, the industry had hoped that more flexibility would be achieved, particularly since the EU seems to be moving in that direction.
“We need to ensure that consumers are encouraged to install energy saving measures and that policy and stable fiscal incentives such as reduced rates of VAT support this. Rules based on the proportion of installation costs versus capital cost could disproportionality disadvantage people in less prosperous areas of the country where installation costs tend to be lower. At a time when we have just declared a climate emergency introducing higher taxes on energy efficiency and low carbon solutions for our homes whilst retaining a 5% rate on fossil fuels doesn’t make any sense.”