VAT and the installation of energy saving materials

10 Jul 2019


In order to bring the UK into line with EU law, HM Revenue & Customs (HMRC) is currently consulting on changes to the reduced 5% VAT rate that has been available for the installation of energy saving materials (ESMs) in residential accommodation. The intention is that from 1 October 2019 the availability of the relief will be severely restricted.


The 5% rate on the installation of ESMs is used extensively in the rural sector where domestic solar and biomass projects are commonplace. The advantage of the reduced rate comes into its own where the property is not being used for business purposes (for example as a farm worker’s cottage) as VAT is a cost of works to residential accommodation that is used either for exempt purposes (long-term letting) or for personal use.

The main changes proposed are that the reduced rate will be:

  • Removed across the board for the installation of wind and water turbines;
    Retained where recipients are aged 60 or over, or are in receipt of certain benefits, and for housing association developments; and
    Retained for all other residential developments where the costs of the materials does not exceed 60% of the total cost of the installation.

The type of items that can qualify for the reduced rate is not being amended other than the removal of wind and water turbines from the scope of the relief. Typical items that can benefit from the reduced rate on installation include solar panels, insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings, ground and air source heat pumps, and biomass boilers.

It is recommended that if you are considering entering into a contract for the installation of ESMs, review whether the expected costs will be more than 60% materials. If so, the 5% relief will no longer be available after 1 October 2019 and the full cost of the installation will be subject to VAT at 20%.

Whilst HMRC has not yet issued its final guidance on the changes, it is understood that there may be a grandfathering provision that will allow contracts entered into before 1 October to benefit from the reduced rate. The details of whether works must have started by 30 September, or whether entering into the contract will be sufficient, has not yet been finalised.

Sean McGinness

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