Update on VAT reliefs for decarbonisation and energy saving materials

To reach the national net zero targets by 2050, all homes in England will need to be decarbonised, including the 2.7 million homes owned by housing associations. 

We have previously covered tax incentives for decarbonisation and VAT reliefs for decarbonisation works in updates last year.

As a reminder, VAT on energy saving materials (ESMs) was reduced to the 0% from April 2022. This rate will apply until April 2027, after which date 5% VAT will apply. The government also added wind turbines and water turbines to the list below.

0% VAT rate is applicable on the installation of:

• Wind turbines – new addition.
• Water turbines – new addition.
• Central heating & 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.

Call for evidence on VAT energy saving materials relief

Earlier this year, HMRC opened a call for evidence seeking views on two further potential areas for reform to the VAT relief for ESMs that may enable the relief to meet its intended objectives more effectively across the whole of the UK.

We are aware that the sector has had difficulty fully utilising this VAT relief. This is because the common approach in the social housing sector, and a recommendation of retrofit experts, is to ensure all components of works are completed together. This is more practical, more cost effective and also minimises the disruption caused to the occupiers.

HMRC’s current position, where energy saving materials are installed as part of a larger refurbishment programme, is that this forms a single supply for VAT purposes and the single VAT liability of the principal supply should be applied to all of the works performed, including the installation of energy saving materials. This means that works which would qualify for zero-rating if supplied separately in their own right are not eligible for relief. VAT is charged at 20% on all the works and the benefit of the VAT relief is not realised.

HMRC have provided some examples when non-qualifying services are supplied at the same time as the installation of ESMs, however it’s current approach is very restrictive. If there are any doubts, contractors will charge 20% VAT – however, we would currently encourage you to have the conversation with your contractor if you think zero rating should apply.

The social housing sector therefore has increased instances of where the VAT reliefs available are not providing the benefit intended, RSM has worked together with the NHF to respond to this call for evidence accordingly. Read our response to HMRC’s call for evidence on VAT energy saving materials relief.

We also sought to highlight that social housing residents are already disproportionately affected by rising bills in relation to their income. For those in energy-inefficient homes the impact is two-fold. Based on the price of energy set at the October Price Guarantee in 2022, social renters are forced to spend on average 5.7% of their income on heating bills, compared to the national average of 3.4%. Those in the least energy-efficient homes (EPC G) will spend as much as 15.5% of their income on heating bills, the equivalent of nearly two months’ worth of their annual income.

It was highlighted that research has identified that a family in an energy-inefficient social home (EPC D-G) will spend on average £1,343 a year on heating bills, based on the October Price Guarantee in 2022. If these homes were insulated and brought up to an EPC band C or above, this would be reduced by 42% to £776, saving them £567 every year. The total saving for residents in all energy inefficient social homes, would be over £700m a year.

Our joint response has also highlighted technologies commonly installed to improve the energy-efficiency of homes, not currently included in the above VAT 0% list. Having consulted with a group of NHF members, the most common items, that also are of significant cost to install, were new energy-efficient windows and insulated doors.

The joint response has been submitted to HMRC, considering the problems highlighted above. RSM and the NHF have specifically asked HMRC to consider the following:

• Adding existing technologies to the VAT 0% list such as double and triple glazing windows and insulated entrance doors which we understand can cost up to £6,300 to make such improvements per property (depending on property size).
• Being able to obtain the 0% VAT relief of energy-saving materials when materials are installed as part of a larger refurbishment programme.

We are hopeful this will have some impact on HMRC and bring about positive change for the sector.

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.