The European Commission’s press release this week was quite stark in its announcement:
. . . The European Commission has decided to refer the United Kingdom to the EU Court of Justice for its reduced VAT rate on the supply and installation of energy-saving materials. This measure goes beyond what is allowed under the VAT Directive.
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 this is part of a social policy. Energy saving materials could be covered by this provision if the conditions are met i.e. if they are used for social policy purposes in the construction, renovation and alteration of housing.
However, there is no provision in the VAT Directive to allow a reduced VAT rate on “energy saving materials” specifically, and the universal application of a reduced rate for energy saving materials is therefore not allowed. By allowing a reduced VAT rate to all energy saving materials, the UK is therefore going beyond the scope of what is permitted under EU law.
The UK government maintains that the reduced rate for energy-saving materials within residential buildings is allowed under the VAT directive.
In reaction, Andrew Warren, Director of the Association for the Conservation of Energy and a tireless advocate of the British reduction of the VAT rate (it took many years to convince the UK government), stated:
This decision from the European Commission is extraordinary. The UK government has been providing lower rate VAT on relevant energy efficiency goods and services for over a decade. It is a complete mystery as to why they should after so many years be trying to quadruple VAT rates. This would mean taxing energy conservation at four times the rate of energy consumption, a market distortion that the EC should be fighting, not encouraging. Our government needs to fight this tooth and nail.
There is something wrong when the Commission, on the one hand, is pushing for ambitious energy efficiency efforts and, on the other hand, becomes so narrow to lose all perspective of the benefits so sorely needed. EiD would encourage more than the UK government to fight this tooth and nail.
Energy in Demand - Sustainable Energy - Rod Janssen 
@Rod (or Warren). What is the objection of the EU? To offering lower VAT on all “energy saving materials” rather than in the context of subsidized housing? Or are they objecting to the extension of the reduction to particular goods? If so, which goods are they — energy efficient electric appliances, for example?
And is this a matter of principle for the EU, or are they also receiving reduced revenues as a result of the policy?
A response to Ron Steenbilk : the main objection by the EC, to the decision by the UK government to lower VAT rates to 5% on certain (but not all) energy efficiency items installed in housing, seems to be that the Commission does not believe this to be a legitimate “social” policy. Under VAT rules that can be the only justification for having lower rates.
Throughout the 12 years this lower rate of VAT has been charged, the UK government has maintained that charging just 5% VAT is indeed part of a social policy, designed to improve housing conditions. What puzzles everyone is quite why the EC has now decided to take such a heavy-handed approach, after accepting the UK case for so many years? Is it perhaps part of a plot to make the EC even less popular in the UK?