VAT reliefs for decarbonisation works

In his Spring Statement to Parliament, the previous Chancellor of the Exchequer announced further VAT reliefs for decarbonisation works.

The previous VAT relief was available at the reduced rate of 5% on the installation of specific energy saving materials in residential homes – this also includes the curtilage of residential accommodation, and applies to the price of the goods to be installed (it won’t apply to the purchase of goods without the installation process).

Prior to Brexit, the UK was not able to add any more categories to our unusual ‘zero rate’ of VAT, which allows no VAT to be charged, whilst maintaining VAT recovery on related costs. Post-Brexit, the government is no longer restricted and has therefore been able to add this list of items to the zero-rating category to provide further VAT relief.

VAT on energy saving materials will be reduced from 5% to 0% from April 2022 to April 2027. This was confirmed in the updated version of VAT notice 708/6 in April this year. The government has also added wind turbines and water turbines to the list which were not on the previous 5% list.

The 0% VAT rate is applicable in Great Britain and includes the installation of:

• Wind turbines – new addition.
• Water turbines – new addition.
• Central heating and hot water system controls.
• Insulation (for walls, floors, ceilings, roofs, lofts, water tanks, pipes and plumbing fittings).
• Solar panels.
• Draught stripping.
• Ground or air source heat pumps.
• Micro combined heat and power units.
• Wood-fuelled boilers.

As always, there are practical questions which arise as a result of trying to maximise these reliefs. For example, HM Revenue and Customs (HMRC) now accept that the installation of an air source heat pump requires different pipe work and larger radiators, and that all of these items when installed together and in isolation qualify to be zero rated. However, it is still the case that if a whole refurbishment of a property is undertaken, including the installation of an air source heat pump, then it is likely that they would view this as a single supply of property refurbishment services subject to VAT at 20%.

Determining the correct VAT liability of transactions consisting of separately identifiable goods and services, which when supplied on their own would be subject to different VAT rates, is not a new problem and there is a significant amount of case law in this area.

For such transactions it is necessary to distinguish between a single or ‘composite’ supply where there is one over all type of supply and an associated VAT liability. Multiple or ‘mixed’ supplies should be distinguished between where the two or more components are separate supplies, each of which has its own VAT liability. This can be determined by considering the following:

a) Is the supply distinct and independent – it must be more than merely a component of the overall supply.

b) Where there are distinct supplies, can each of them be regarded as a principal supply or are some of them merely ancillary to the principal supply. In the case of the latter, a supply should be regarded as ancillary to a principal supply if it does not constitute an aim in itself but is a better means of enjoying the principal supply.

In addition, a supply which comprises a single supply from an economic point of view should not be artificially split, but the fact that a single price is charged is not always decisive. If circumstances indicate that the customer intended to purchase two distinct supplies, then even where there is a single price payable this would need to be apportioned.

Whilst HMRC provide some examples of when the zero rating relief will apply when other non-qualifying services are supplied at the same time as the energy installation, this list is not exhaustive. The guidance does not fully consider the criteria outlined above and is somewhat simplified.

If this is used as a sole reference point for help in determining the VAT rate to be applied, it is unlikely to provide a definitive answer, and as such if there is any doubt, contractors will charge 20% VAT. However, do not be afraid to have the conversation with your contractor if you think zero rating should apply.

From our discussions with the sector, we understand why it is not always appropriate to undertake energy savings works in isolation. The inconvenience to residents, as well as missed opportunity to make wider cost savings, more often than not make this impractical. To work around this, we recommend that registered providers obtain a separate quote and enter into a separate contract in relation to the energy installation works. You should also ensure that these works are invoiced separately as this will help to demonstrate your intent and show that the supply and installation is a separate and distinct supply, even if the works are delivered at the same time as other works by the same supplier.

Over the coming months it may become clearer how generously HMRC will apply the use of these reliefs.

RSM is a leading provider of audit, tax and consulting services, with around 3,800 partners and staff in the UK. We're working with our tax advisors RSM to help shape government policy on taxation as it affects the sector and to keep housing associations informed of key issues.