Enforcing an EU Directive may damage the Green Deal - and further depress the market for everyday building materials due to higher VAT, according to The Builders Merchants' Federation (BMF).

The European Commission has told the Government to amend UK legislation which allows a reduced VAT rate for the supply and installation of energy-saving materials, such as insulation. According to Brussels, the current 5% rate levied on these materials is illegal, and if the Government does not change British law within two months, the Commission may refer the matter to the European Court of Justice.

Brett Amphlett, BMF Policy Manager, said: "At a time when the BMF has been urging the Coalition Government to extend the 5% VAT rate to all Green Deal projects, the European Commission's move could be disastrous. Any increase in the cost of materials will affect the Golden Rule calculation.

"The ruling will have major implications for the Green Deal if the Government is forced to increase VAT on insulation, central heating and hot water system controls, heat pumps and solar pv and thermal panels to the 20% standard rate."

The BMF believes that it is wrong to apply 5% VAT on energy consumption but 20% VAT for energy conservation and says the 5% rate should apply to both.

Mr Amphlett said: "The BMF wrote to Treasury Ministers back in March outlining the compelling case to review current VAT rules and rates. Existing arrangements are complex, confusing and do not favour green improvements.

"We reckon most SME builders do not know how these apply at present - and it is unlikely their customers do either. But these are the very same people the Government wants to adopt the Green Deal when it comes into force in 80 days' time".

What concerns the BMF is that as Parliament goes into recess for summer next week the VAT change may slip through "on the nod".