HMRC to narrow scope of VAT relief for efficiency measures

The amount of energy efficiency measures to benefit from a reduced VAT rate is set to be cut in order to bring the UK into line with EU rules, HMRC has confirmed.

The changes have been set out in draft legislation introduced by the government which will reduce the scope of the reduced rate of 5% VAT for the provision and installation of energy-saving materials (ESMs) such as solar panels

The move follows a judgement from the Court of Justice of the European Union (CJEU) in 2015, which was subject to an initial consultation in 2016.

This found there was recognition that the UK had to comply with EU law and general agreement that the legislation itself met the objective of complying with EU law. The 2015 to 2016 consultation originally proposed the full removal of the VAT relief for solar panels.

HMRC has now published the outcome from a second consultation on the draft legislation which took place between April and May this year, following further discussions with the EU Commission with the aim of minimising the impact on businesses and consumers from the changes. This has resulted in the retention of solar panels as energy-saving materials and the introduction of a 60% threshold.

The proposed amendments will maintain the reduced rate on installations of ESMs in residential accommodation for recipients who are aged 60 or over or receiving certain benefits, and for housing associations.

However, the new measures will remove the reduced rate for the installation of wind and water turbines.

The legislation will also limit the reduced rate to the labour cost element of a supply of installation where the value of the materials exceeds 60% of the total cost charged to the customer. This restriction will not apply where the customer satisfies certain conditions (is aged 60 or over or is in receipt of certain benefits), the supply is to a relevant housing association or the building in which the ESMs are installed is used solely for a relevant residential purpose.

The latest consultation had 14 responses from businesses, industry and tax representative bodies. HMRC said no changes were made to the legislation as a result of the consultation but comments will be used to improve guidance, which is set to be published in August.

The legislation will take effect from 1 October 2019.

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