The European Court of Justice (ECJ) has ruled that the UK has failed to comply with the VAT Directive as it has applied a reduced rate of VAT to the supply and installation of energy saving materials for housing. The ruling was originally put in place in 2011 – BSRIA is hugely disappointed that the carbon reduction industry has been singled out to be charged the standard rate VAT.

Affecting the installation of energy saving measures including insulation, central heating and hot water system controls, heat pumps, solar photovoltaic and solar thermal panels, and wind and water turbines, the ruling means that such measures can no longer benefit from a reduced rate of 5% VAT. Instead, the ECJ ruled they will have to be charged at the standard UK VAT rate of 20%.

BSRIA Chief Executive, Julia Evans, said: “Government should have the courage of their convictions; yet again the energy efficiency industry is to suffer at the hands of this decision. Installation of energy-saving materials is the only category within the 5% reduced rate VAT that will be increased to the standard rate; all other categories – such as children’s car seats, mobility aids for the elderly, nicotine patches, residential conversions and renovating a dwelling that has been empty for at least two years, domestic fuel and the installation of energy-saving materials in residential properties – will remain at the reduced rate. This decision, therefore, flies in the face of the industry trying to achieve its climate change targets and build on energy-saving measures. If government could have exercised continued discretion for longer – this would have helped. Sticking at the reduced rate would have served as an incentive for the industry. The judgement also presents a direct challenge to the UK government commitments made in the Queen’s Speech. 

The decision by government to pass on the ECJ’s judgment now is a further example of the EU curtailing the UK’s legislative freedom. Depending on the government’s response, it could also lead to higher costs for affected groups seeking to improve the energy-efficiency of their homes.

More and more, BSRIA is getting the impression that energy and carbon reduction issues are being viewed as a burden to government which is inhibiting, not only the industry, but the economy at large. The recent government announcement of the end of the UK’s zero carbon buildings policy is a further example of this. As a minimum, government is sending mixed messages on carbon reduction policies which are of great concern.

The undoubted impact of these measures will be a significant rise in costs for consumers and others installing energy-saving materials – for example – in residential homes and home-owner-occupiers. Only social housing tenants will be provided with the supply and installation of energy-saving materials at a reduced rate. Government may also need to find a more efficient way of promoting energy efficient materials while remaining in line with EU VAT law, possibly through the use of direct subsidies.” 

There is no opportunity for government to appeal the decision of the ECJ. Changes will not take place until Budget 2016.