Should energy efficiency tax breaks only target the needy?

ruling passed down by the Court of Justice of the European Union (EJC) said  ‘The United Kingdom cannot apply a reduced rate of VAT on the supply of energy-saving materials, since that rate (5%) is reserved solely for social housing’.  the UK applied a reduced 5% rate of VAT to ‘energy-saving materials’ which are supplied and installed in existing housing. However soon after this the European Union argued that the ‘blanket’ application of the reduced VAT to all housing in the UK failed to comply with the EU VAT Directive.


The Installation of energy-saving materials in new buildings is already ‘zero rated’ as part of the construction phase and  residential conversions and renovating a dwelling that has been empty for at least two years will remain at the reduced rate. From an energy efficiency perspective this EU ruling, on the face of it seems unfair but perhaps they were right to call the 15% VAT reduction into question. We must keep in mind that a tax exemption such as this whilst seemingly good idea could actually have an ‘imbalancing’ impact on society as a whole.


We need to remember that ‘the installation of energy-saving measures’ is a rather loose term. It actually includes insulation, central heating and controls, hot water systems, heat pumps, solar photovoltaic and solar thermal panels, and wind and water turbines. All these energy-saving measures have been benefiting from a reduced rate of VAT. Now the ECJ has ruled they will have to be charged at the standard UK VAT rate of 20%.


As you might expect, there are plenty of vested interest groups and businesses angered by the decision and no group worked harder to encourage the VAT reduction provision that the Association for the Conservation of Energy (ACE) who had campaigned for the change for a number of years.


The court upheld the ruling that ‘the VAT Directive permits the application of a reduced rate of VAT solely to the provision, construction, renovation and alteration of housing which relate to SOCIAL housing or to services supplied as part of a social policy. It follows that the VAT Directive precludes national measures which have the effect of applying the reduced rate of VAT to the provision, construction, renovation and alteration of ANY housing, irrespective of the social context in which such operations take place.’


It seems that this ruling actually seemed quite pertinent because a blanket reduction in VAT for energy-saving measures may have been encouraging a ‘leakage’  of taxpayers funds towards the wealthier in society – people that could already afford or justify (financially) the installation of energy-saving measures. What might be a better solution (and I think this may be what the EU wants to achieve) would be the application of a robust means-test to qualify for the support of VAT reduction. This would ensure that those in most need and least able to afford fuel (let alone fuel saving measures) can access the benefits of the tax break. However, as the UK government are continuing to pull the legs from under the green building industry with continued cutbacks and reductions in government support, it would be good if this tax break remained for the near future or was phased out really quite slowly.

Certainly there is plenty of evidence that energy provision measures will and do save householders money so those that can afford it should probably pay the normal price. The role of government and it does have a role here would be to legislate properly for minimum standards and also ensure that it protects the vulnerable which frankly it continues to avoid doing. The tax break that was called into question was probably a fudge that is at best – subsidising the insulation industry (which in the main is very well established and in need of little more support than any other sector of the industry) and at worst – just helping the the wealthy to become wealthier.


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