Tax Incentives for decarbonisation

England’s homes produce more carbon emissions every year than is produced by all the country’s cars. To reach the national net zero targets by 2050 all homes in England will need to be de-carbonised, including the 2.7 million homes owned by housing associations.  

The Scottish Government has already created Zero Emissions Social Housing Taskforce and in England and Wales up to £160m was to be made available to Registered Providers following the 2019 Conservative Manifesto commitment to a £3.8bn Social Housing Decarbonisation Fund (SHDF) over a 10-year period. These are all efforts to improve the energy performance of social rented homes, on the pathway to Net Zero 2050, so what part can tax play in this agenda? 

VAT reliefs for decarbonisation 

There are existing VAT reliefs which can be utilised to help reduce the cost of decarbonisation.  

Installation of energy saving materials 

The reduced rate of VAT (5%) is available for installing 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).  

Of course, there are conditions attached, which should be reviewed in advance, such as the supply of the installation being to a qualifying person (aged over 60 or in receipt of specified benefits such as housing benefit, job seeker’s allowance etc in their sole or main residence) or to a relevant housing association.  

This incentive includes the installation of: 

• Central heating and hot water system controls. 
• Insulation. 
• Solar Panels. 
• Draught stripping. 
• Ground or air source heat pumps.
• Micro combined heat and power units. 
• Wood-fuelled boilers. 

The reduced rate of VAT is also available for grant-funded installations of heating appliances, central heating and renewable source systems.  
Remember that if energy-saving materials is installed whilst constructing new homes then the supply is zero-rated. 

Conversions of buildings  

Some housing associations have been repurposing existing buildings in recent years. Whilst new builds qualify to be taxed at the zero VAT rate, conversions of existing buildings can be zero-rated, reduced-rated or standard rated. The inclusion of works that help to minimise the carbon footprint of a building when undertaking such works can be beneficial especially when those works do not qualify for any of the current VAT reliefs, for example installation of double/triple glazing. As housing associations have restrictions in how much VAT they can recover, not incurring VAT in the first place is the best approach to save money on decarbonisation.  

Conversion of a non-residential building (e.g. office space) to accommodation is eligible for the VAT zero-rate subject to conditions. There are rules around the definition of non-residential buildings and this can include a building that has not been used as residential for 10 years (where it might have previously been dwelling but has been vacant for over 10 years example).  

If a property has been empty for less than 10 years but more than two years, conversion costs are reduced rated instead – still a useful saving.  
Finally, an existing residential building can be converted to a different type of residential use such as a care home becoming housing. Here the conversion costs can be taxed at the reduced rated, but there is also the possibility of zero-rating for areas not previously used for residential use. This could include office areas and communal areas.  

Decarbonisation projects 

Some decarbonisation projects may themselves be income generating, for example solar panels, as well as other eligible low-carbon technologies including: wind, hydro, micro combined heat and power, anaerobic digestion where the housing association is entitled to receive feed-In tariff (pre March 2019), or Smart Export Guarantee (SEG) 
 
Where a project is income generating consideration needs to be given to the VAT liability to be applied, which it turn will afford the housing association the opportunity to recover in full VAT incurred on associated costs. 

It is unfortunate that such income might be subject to corporation tax, even if received by a charitable housing association. Although the corporation tax liability may possibly be mitigated by undertaking the project within a subsidiary company or through relief for interest costs, it would be preferable for the government to remove these tax hurdles to the delivery of decarbonisation projects by housing associations.  

The government has set clear and challenging goals for the UK to meet net zero by 2050. Whilst the above reliefs are useful, to support both commercial and social housing landlords in improving the carbon-efficiency of their portfolios, the government could reengineer current tax policy to incentivise these organisations further and accelerate investment in decarbonisation projects for example: 

• Application of the zero-rate when costs are incurred by a registered provider. 
• Removing some of the barriers to claiming the reduced rate of VAT for the installation of energy saving materials. 
• Tax credits for landlords (including charities) that incur certain expenditure on improving the energy efficiency of their property portfolio. 
• Broadening the charitable tax exemptions to include income from decarbonisation projects.