The UK government is to fight an EU ruling that the UK must raise VAT on energy efficiency products from 5% to 20%. VAT was reduced to 5% on energy efficiency products in the UK because government wants to tackle fuel poverty, reduce carbon emissions and create jobs. Andrew Warren of the Association for the Conservation of Energy provides an important column, which appears in the September issue of Energy in Buildings & Industry magazine, describing the issues involved.
Should energy-saving products be subject to the full 20 per cent rate of VAT? The UK and the European Commission are set to do battle in the courts
Next spring a case will be heard in the European Courts. The result could seriously damage the prospects for the government’s flagship Green Deal programme. This would increase the costs of installing many key energy-saving measures and by doing so, render many potential packages simply too expensive to undertake.
Under the Golden Rule, the costs of installing any package of improvements funded by Green Deal Finance must be capable of being repaid during the lifetime of the loan. To qualify, calculations are made, valuing potential consequent reductions in energy consumption at its present price against the costs of measures installed (plus interest). Monthly loan repayments must be more than matched by putative energy savings. If on paper this cannot be shown to be profitable to the householder, no loans will be able to be made.
If the European Court of Justice rules against the UK government, then the cost of installing a whole range of familiar energy-saving items – thermostatic radiator valves, microgeneration, and every kind of insulation installed by contractors – will increase overnight by a whopping 15 per cent. That includes the costs of installation, as well as the costs of materials.
Expanded the list
At issue is the rate at which Value Added Tax is charged upon the cost of buying and installing these measures. Ever since the turn of the century, the UK government has gradually expanded the list of energy-saving devices that qualify for lower rate VAT. In large part, this intervention was motivated by concern that it was iniquitous to tax energy consumption at a lower rate than that on energy conservation. As the rate on electricity and gas consumption has long been set at 5 per cent, it was deemed appropriate to reduce the levels for energy conservation to the same level.
Many argued for discriminating in favour of energy saving by zero rating energy-saving measures. Others argued for widening the categories of goods covered, to include the most highly efficient windows or boilers. While sympathy was expressed for both arguments, Her Majesty’s Revenue and Customs (HMRC) held the view that both options would contravene the VAT directive, and thus be in breach of European law.
Now, twelve years after the 5 per cent rate for some key energy-saving measures was introduced, the European Commission (EC) is challenging even their legality. And is seeking to force the UK government to remove all exemptions, thus raising the VAT rate for all energy efficiency actions to the full 20 per cent.
Shortly after the General Election, the relevant part of the EC, DGTAX, sent an initial informal “pilot exercise” expressing disquiet about these lower VAT rates, as being beyond the “vires” of the permissible categories for reductions. A ‘formal notice’ followed last September. HM Revenue & Customs (HMRC) were confident they had robustly answered the rather generalised objections.
This summer HMRC received an official Reasoned Opinion, claiming that the existing concessions were in breach of Annex 3 of the latest VAT directive. This states in paragraph 10 that the 5 per cent rate is permitted only for the “provision, construction, renovation and alteration of housing, as part of a social policy”. Paragraph 15 states that “supply of goods and services” must be “by organisations recognised as being devoted to social wellbeing.”
Given the enormous social (as well as ecological) benefits of making our homes energy efficient, both these requirements can certainly be deemed to apply to all those carrying out Green Deal-accredited installations. The Cabinet Office minister Oliver Letwin, briefed by HMRC, has robustly rejected the inference that installing energy saving measures does not have a social purpose.
During the last set of VAT negotiations (2008/9), the UK Government did make strenuous attempts to have this Para 10 criterion widened, explicitly to enable all residential energy-saving measures (including improvements to boilers and windows) to qualify. Even though this was officially supported by the EC, the desire to retain the status quo eventually prevailed. Consequently, in many member states, like the UK, energy consumption continues to be taxed at a lower rate than energy conservation. The suspicion is that it was this advocacy, even though it was unsuccessful, that may have prompted this belated intervention.
Procedures will begin
Should the Commission not accept Mr Letwin’s arguments, as seems most likely, official infraction procedures will begin, and the issue will eventually proceed to the European Court of Justice. From the time the Commission’s official response is received this autumn, the UK government will have just six weeks to prepare its full “Written Observation.” This will then be sent, under the name of the Treasury Counsel, not to the Commission but to the European Court.
It is anticipated that the Court hearing will take place next spring, but the final decision could be delayed until much later in the year.
This will take place at a time during which time no UK politician would logically want to be associated with arguments to widen VAT reduction eligibility. Unless of course they wished to challenge the European Commission’s right to decide which measures the UK government might wish to promote in order to improve our housing stock. In which case, they might want not just to lower the existing 5 per cent rate, but to escalate the work previously being undertaken quietly within government, to expand the lower VAT rate to cover both boilers and glazing materials too. And in that way, strengthen the flagship programme, the Green Deal.
Energy in Demand - Sustainable Energy - Rod Janssen 