New VAT Rules on ‘Energy Saving Materials’ are now in force. Are you ready?
What is happening and when?
From 01 October 2019 the scope of the VAT reduced rate (5%) for energy saving materials is being restricted to comply with EU law. The UK rules were found to go beyond what is permitted under EU law.
Supplies which would previously have qualified for the reduced rate, will now only qualify if they meet the new and more restrictive tests which are noted below. This is not good news for sector or the environment.
The new rules affect supplies of installations of energy saving materials that are made on or after 1 October 2019. Supplies that are paid for before 1 October 2019, and supplies made to a contract in line with the law entered into before that date, are not included.
Who is impacted?
Any contractor or subcontractor installing energy Saving materials including:
- Controls for central heating and hot water systems Draught stripping
- Solar panels
- Wind turbines
- Water turbines
- Ground source heat pumps
- Air source heat pumps
- Micro combined heat and power units
- Wood-fueled boilers
What are the changes?
New social policy conditions and 60% threshold
From 1 October 2019 the reduced rate will only apply to the installation of energy saving materials (and energy saving materials supplied with installation), where the supply meets one of the new social policy conditions noted below, or a new 60% test is met in relation to materials.
Social Policy Conditions
The supply of the installation is to a ‘qualifying person’ and in the qualifying person’s sole or main residence. A qualifying person is a person who is:
- Aged 60 or over; or
- Is in receipt of certain benefits (e.g.) Child Tax Credit (other than the family element), Council Tax Benefit, Disability Living Allowance, Disablement Pension, Housing Benefit, Income-based Jobseeker’s Allowance, Income Support, War Disablement Pension and Working Tax Credit.
The supply of the installation is to a ‘relevant housing association’ which includes registered social landlords and registered housing associations.
The supply of the installation in residential accommodation is in a building or part of a building used solely for a ‘relevant residential purpose’. This includes children’s homes, care homes etc.
Note: subcontractors are unlikely to meet Condition 1 or 2 due to who they supply i.e. a main contractor and may need to rely on the 60% test below for reduced rating.
New 60% Test
Where one of the above social policy conditions is not met, it is necessary to look at the new 60% test for materials.
If the open market value purchase price (excluding VAT) of all goods supplied to the customer (as part of the installation which remain in place once the job has been completed) is greater than 60% of the total value of the supply to a customer (excluding VAT), an apportionment is now required between materials (which will be become standard rated) and labour (which will be reduced rated).
A contractor pays £500 (excluding VAT) for material and charges its customer £1,000 (excluding VAT) for the installation. Since the cost of materials is only 50% of the value of the total supply, the contractor can charge the reduced rate of 5% on the total supply i.e. 5% of £1,000 = £50.
A contractor pays £7,500 for materials (excluding VAT) and charges its customer £10,000 (excluding VAT) for the installation. Since the cost of the materials is 75% of the value of the supply, the supplier will need to separately identify the value of the materials and charge VAT at the standard rate on the supply of those materials to its customers. The labour element of the supply will continue to qualify for the reduced rate.
Supplies where the material cost is likely to be a high proportion of the value of the supply e.g. solar panels, will not generally be eligible for reduced rating unless one of the above social policy conditions is met, which could have a significant impact.
It is important to note that despite HMRC having the opportunity to bring the reduced rating of energy saving materials in line with other reduced rate reliefs, HMRC have not done so. If the supply of energy saving materials is only a part of a wider standard rated supply (rather than a separate supply) no apportionment is allowed for energy saving materials and the whole supply will still be a single standard rated supply. Where the energy saving materials are not the predominant element of the supply e.g. insulation installed as part of the construction of a residential extension, this will be standard rated.
The reduced rate has been removed for:
- Wind turbines
- Water turbines
From 1 October 2019, the installation of wind turbines and water turbines is subject to VAT at the standard rated (20%). Although originally intended for removal as part of the new measures, solar panels have been retained in the scope of the reduced rate.