EU holds out hope for UK’s green goods tax break

BusinessGreen reports (below) that the European Commission recently ordered the UK government to repeal a law that allows reduced rates of VAT on insulation materials and solar panels, on the grounds that it fails to comply with the EU’s VAT Directive. In a bizarre move, the European Commission suggests a defence that the UK can use after ordering Treasury to end the reduced VAT rate.  Readers can follow developments on the website of the Association for the Conservation of Energy.  ACE has argued for years in favour of the VAT reduction.  It now says on its website:  “If the UK were to comply – by increasing the VAT from 5% to 20% across a range of energy saving products – it would strike a huge blow to an industry already facing an uncertain future.”

EU holds out hope for UK’s green goods tax break

By Jessica Shankleman, BusinessGreen

The European Commission has offered the UK a way round a ruling that would otherwise stop energy saving materials receiving tax exemptions – a move that experts have warned could undermine the success of the government’s Green Deal energy efficiency programme.

The Commission last week ordered the UK government to remove a law that allows reduced rates of VAT on insulation materials and solar panels, on the grounds that it failed to comply with the EU’s VAT Directive.

Reduced VAT rates can be applied only to goods and services listed in the Directive, such as water and some food.

Industry insiders maintain low rates of VAT will play an important role in ensuring the success of the government’s flagship Green Deal energy efficiency programme, by ensuring that monthly repayments for energy efficiency measures do not cost more than the resulting energy savings they deliver.

The Treasury has already signalled that it disagrees with the Commission’s decision, hinting it could fight the order.

But in a bizarre move the EU now appears to be offering the UK a possible defence against the order.

A spokesman for the European Commission told BusinessGreen that the UK could defend the exemption using a clause in the VAT directive that allows reduced VAT rates on construction and renovation programmes that are part of a social policy.

The defence however would depend on the government being able to argue that its Green Deal scheme and accompanying Energy Company Obligation (ECO) initiative are social policies.

“Social policy in the field of housing would include governments’ interventions to enhance housing opportunities for low-income persons,” the spokesman said.

He also pointed to a clause in the EU’s Council Directive proposing that Member States should be allowed to apply a reduced VAT rate in the housing sector more generally.

“This would indeed allow for reduced rates on the supply and installation of “green products”, he said.

However, he added that the Directive was unclear about whether lower VAT rates could be applied as a tool for achieving environmental policy objectives.

The EU’s statement suggests the UK may be able to retain the VAT reduction and that the ruling could be more of a bureaucratic issue for Brussels.

However, it has nevertheless caused anxiety among some green building industry insiders already concerned that the Green Deal will fail to deliver the insulation rates required to help lower the carbon emission of the UK’s housing stock.