New VAT Zero-Rating for Energy Saving Materials

06 June 2022

Constructing and maintaining sustainable buildings incorporating eco-friendly materials and concepts is increasingly important given the current environmental, social and governance (ESG) agenda.  Accordingly, there have been significant moves in the direction of carbon neutrality and energy saving.

A valuable new VAT relief in this area was announced by the Chancellor in his recent Spring Budget Statement.

This is a temporary five-year zero-rate for the installation of Energy Saving Materials (ESMs) in England, Scotland and Wales.

It is necessary that the ESMs are installed in, or in the curtilage of, residential accommodation.  There does not appear to be any corresponding relief for purely charitable buildings.

The relief does not apply to supplies of ESMs only – the ESMs need to be installed to qualify for zero-rating.

Conversely, if the supply is installation only, and the goods fall within the definition of ESMs, the zero-rate will apply to the installation service.

The new zero-rate replaces the previous 5% reduced-rate which, after intervention from the EU, came with conditions regarding social purpose and the relative cost of materials.  These tests have been removed, possibly permanently, but certainly for the duration of the zero-rating period.  It is stated that the VAT rate will revert to the reduced-rate (currently 5%) from 1 April 2027.

HMRC’s published guidance on the ESMs which qualify is still relatively thin on the ground, but the following are specifically mentioned:

  • controls for central heating and hot water systems
  • draught stripping
  • insulation
  • solar panels
  • ground source heat pumps
  • air source heat pumps
  • micro combined heat and power units
  • wood-fuelled boilers
  • wind turbines
  • water turbines

HMRC’s guidance also talks about ‘ancillary supplies’, and gives examples of what they think can and can’t qualify for VAT relief.  For example, a loft access put in as part of a loft insulation project could qualify; whereas, the fitting of a new roof which just happens to be insulated may not.  Clearly, each ESM project should be viewed on its own merits, and it may be there has to be a judgement call on what is the ‘principal supply’ for VAT purposes in each case.

If you have budgets or are claiming grant monies for the installation of ESMs in residential property, you should take advice on the appropriate VAT rate, ideally before you speak with your contractors and tender for works.