More on UK’s VAT issue with European Commission

In the recent post on Britain’s taxing issue, EiD quoted Andrew Warren, Director of the UK Association for the Conservation of Energy.  Following other comments that EiD has received, Andrew has kindly provided the following extended note.  As all Europeans are trying to address how to finance energy efficiency investments, this is an important issue needs to be resolved on the side of reason.  If such policy instruments are not to be used for such beneficial purposes, there is something fundamentally wrong.  EiD hopes that the European energy efficiency community will raise its voice to this cause.

From Andrew Warren . . .

Later this year a case will be heard in the European Courts. The result could seriously damage the prospects for the UK government’s flagship  Green Deal energy efficiency programme. It would increase the costs of installing many key energy saving measures- and by doing so, render many potential packages simply too expensive to undertake. In strategic terms, it can make the European Commission no friends at all, in a country where Europhobia is fast taking residence in many of its media outlets   and hence its politicians.

Witness the outrage expressed immediately by Martin Callanan, the leader of the Conservatives in the European Parliament: “This is a typical case of jobsworth bureaucrats who lose all common sense when they enter their ivory tower. The Commission cannot propose stringent environmental legislation on one day, and then demand we drop a major scheme aimed at reducing energy use the next.”

His party are the largest party in the present Government, the party of Prime Minister David Cameron – who only days before the Commission’s bombshell had pledged to make Britain “the most energy efficient country in Europe.”

Under the UK government’s 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%. That includes the costs of installation, as well as the costs of materials.

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%, 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. Whilst sympathy was expressed for both arguments, Her Majesty’s Revenue and Customs (HMRC) – the tax collecting department –  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% 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%.

According to the Commission’s dubiously-named  “ Reasoned Opinion”, the existing concessions were always in breach of Annex 3 of the latest VAT directive. This states in paragraph 10 that the 5% 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 homes energy efficient, both these requirements can certainly be deemed to apply to all those carrying out Green Deal-accredited installations. The UK 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 after twelve years of acceptance of the concession.

This will take place at time, during which no politician might logically want to be associated with arguments to widen VAT reduction eligibility. Unless of course they wished to challenge the European Commission’s entire right to decide which measures the UK government might wish to promote in order to improve the housing stock.

In which case, they might want to really challenge the Commission outright. Even those usually deemed to be strong pro- Europeans might not just want  to lower the existing 5% 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.

By initiating this intemperate and  spiteful court case against a popular UK policy, the European Commission’s jobsworths could yet find that preparedness to fund their entire ivory tower might well be put under threat.