In March 2022, the Chancellor (at the time, Rishi Sunak) announced a time limited change in the VAT rate to apply to the supply and installation of energy-saving materials (ESM). We take this opportunity to recap on what has changed and look at the scope of the VAT zero-rate for installations of ESM.
From 1 April 2022, the zero-rate of VAT (0%) applies to the installation of ESM with respect to residential accommodation. The VAT rate will revert back to 5% on 31 March 2027, unless the zero-rate period is extended.
The law change has also simplified the availability of the VAT relief by removing the social policy conditions and the 60% test, which businesses previously had to consider when determining the VAT treatment to apply to the supply and installation of ESM.
The changes apply in England, Scotland and Wales only, with additional funding for Northern Ireland being provided through its funding formula. This is due to Northern Ireland’s rather unique position under the Northern Ireland Protocol.
The relief only applies to installations of ESMs in, or in the curtilage of residential accommodation. This includes:
- Houses, blocks of flats or other dwellings
- Armed forces residential accommodation
- Children’s homes
- Homes providing care for the elderly or disabled.
- Institutions that are the sole residence of at least 90% of their residents
- Monasteries, nunneries and similar religious communities
- Residential accommodation for students or pupils
- Self-catering holiday accommodation
- Caravans used a permanent habitation
- Houseboats designed or adapted for permanent habitation.
The relief does not apply to hospitals, prisons (or similar institutions), hotel (or inns) or comparable establishments.
Eligible energy saving materials
Eligible energy saving materials include:
- Controls central heating and hot water systems
- Draught stripping
- Solar panels
- Ground source heat pumps
- Air source heat pumps
- Micro combined heat and power units
- Wood-fuelled boilers
- Wind turbines.
- Water turbines.
Installation means the putting in place of ESM which would involve some process by which materials are permanently fixed in place, although loft insulation may simply need to be unrolled and positioned in place to be installed.
ESM with other works
It will be common for other goods and services to be provided at the same time as the installation of ESM, and access to the zero-rate relief becomes more complicated.
Installation of ESM only
The service of installing ESM is zero-rated. For example, a supplier is contracted to install solar panels only on a residential dwelling, the supply will be zero-rated under the ESM relief.
Installation of ESM with ancillary supplies
Certain ESM that are installed with other ancillary supplies will be zero-rated. HM Revenue & Customs (HMRC) gives an example of loft insulation, where to complete the installation, a loft-hatch is required to be cut in the ceiling. This would constitute the installation of ESM with ancillary supplies as the loft-hatch only needs to be constructed as a result of the installation of the loft insulation. The whole supply would be eligible for zero-rating.
Conversely, if the existing roof was being replaced with a new insulated one, the insulation would be considered ancillary, and the entirety of the works would be subject to the standard rate of VAT.
Installation of ESM with other goods and services
Sometimes a number of goods and/or services are supplied at the same time, forming an overall single supply for VAT purposes. An example of this would be the installation of a new boiler, along with radiators, pipes and heating controls. Although these individual components might be supplied on their own, if supplied at separate times (some components may even be eligible for the zero-rated relief), the overall supply is a single supply of a ’central heating system’ which is not eligible under ESM relief. Subsequently, the supply of the ’central heating system’ is standard-rated.
If more than one contract is taking place at the same premises, the VAT liability will depend on the circumstances. For example, where a contract is drawn up for an extension to a residential dwelling, and as part of that contract ESM are due to be installed, there can be no apportionment between the supply of the extension services and the installation of the ESM. HMRC’s view is that this is a single supply of construction services on which VAT will be due at the standard-rate.
However, if a contract for construction services is entered into and those services are standard-rated, then consideration could be given to entering into separate arrangements for the supply and installation of any ESM, which would potentially be eligible for the zero-rate of VAT. Advice should be taken on this point.
If ESM are installed during the course of construction of a new dwelling, the supply will be zero-rated because there is a zero-rated relief in place for the construction of new residential dwellings.
The zero-rate of VAT on the installation of ESM is a real opportunity to save costs on such installations. In many instances the VAT incurred on the installation of ESM will not be recoverable because it is either a private cost, or the cost is connected with a residential rental property (which would be VAT exempt with no right of VAT recovery). If you are considering any form of ESM installation, it is important that you confirm with the contractor that they are aware their service is subject to the zero-rate of VAT. It is recommended that discussions around the VAT rate take place before any tenders or quotes are accepted and the works commence.
If you have paid for an ESM installation undertaken after 1 April 2022 and the contractor has applied 5% or even 20% VAT, we would advise contacting them to request they reconsider their position and refund you the overcharged VAT, in instances where the supply is eligible for the zero-rate of VAT.
Please get in touch with your usual Saffery contact if you are considering ESM installation (in isolation or part of a wider redevelopment), or if you have had such an installation since April 2022 and were charged VAT at a rate other than 0%. Alternatively, speak to Nick Hart, VAT Director.