Will Nichols of BusinessGreen writes about the problems the UK has been having to convince the European Commission of the importance of a lower VAT rate to improve energy efficiency in buildings.  It becomes all the more important as the UK rolls out the Green Deal.  One would think the Commission would be encouraging this form of financial instrument.

UK set to defend Green Deal tax break from EU threat

The UK has reiterated it is prepared to defend in the European Court reduced tax rates for energy saving materials that are deemed crucial for its flagship Green Deal efficiency programme, should the EU decide to press ahead with a legal challenge against the policy.

Brussels warned the government earlier this year that levying a cut-price VAT rate of five per cent on insulation materials contravenes the EU VAT directive, which states the low rate is only applicable for the “provision, construction, renovation and alteration of housing, as part of a social policy”.

It has since begun infringement proceedings demanding the rule be changed to bring the VAT rate in line with the current level of 20 per cent.

The UK has refused to increase the tax rate, except for charitable buildings, on the basis the lower rate delivers significant economic and environmental benefits by reducing the cost of installing energy-efficient products.

The government’s stance means the EU now has to choose between dropping the case or taking the government to the European Court of Justice.

“We are considering the next step,” a spokeswoman for Tax Commissioner Algirdas Šemeta told BusinessGreen, refusing to rule out a legal challenge.

She also declined to put a timeframe on when a decision may be taken, although BusinessGreen understands the insulation industry expects the case to go to court.

HMRC is leading the case for the UK, but was unable to respond to a request for comment before going to press. However, a spokesman for the Department of Energy and Climate Change (DECC) said the UK would defend the case should it come to the European Court of Justice.

“That is my understanding, yes,” he said. “We disagree with what’s been put forward by the European Commission.”

However, the spokesman would not be drawn on the possible implications should the UK lose the case, following industry concerns it may impact on the Green Deal, the UK’s programme to upgrade its building stock by providing loans to property owners covering the cost of energy efficiency measures.

The loans are paid back via a levy on energy bills, but are dictated by the so-called Golden Rule that the expected financial savings of the proposed measures must be equal to or greater than the costs attached to the energy bill.

As such an increase in VAT to 20 per cent poses “a very serious threat” to the Green Deal because it could push many improvements outside of the scope of the Golden Rule and therefore disqualify them from the programme, according to Dave Sowden, chief executive of the Micropower Council.

“This would put the price of all installed measures up by about 15 percentage points,” he told BusinessGreen. “Energy itself is taxed at five per cent, so it seems perverse to tax things that save energy at a higher rate.”

Sowden pointed out that rates paid under feed-in tariffs and the renewable heat incentive were also calculated based on the five per cent VAT rate, meaning any change would significantly impact their financial viability.

Sowden was one of 18 senior figures from industry organisations and NGOs who wrote to Cabinet Office Minister Oliver Letwin in August to warn a quadrupling of the VAT rate would dampen demand for the Green Deal, have “a highly damaging effect on the already depressed state of the energy efficiency industry, and do little to help boost jobs in the construction sector”.

The letter, co-ordinated by the Association for the Conservation of Energy (ACE), said the UK could mount a “robust defence” of the five per cent rate on the basis a programme designed to mitigate carbon emissions and prevent fuel poverty constitutes a “social policy” and is also in line with the EU’s energy efficiency directive.

However, there are worries any penalties imposed by the Commission to cover the difference in tax rates may hit finance available for the Green Deal scheme.

The ongoing row poses more problems for the government, which has already been forced to reassure businesses and politicians Green Deal financial packages will be in place in time for the official start of the scheme on 28 January.