Government response to VAT relief on installation of Energy Saving Materials

In December, the Government issued the summary of responses to its previously published Call for Evidence (CfE) from March 2023, seeking views on potential areas of further reform on the VAT relief for Energy Saving Materials (ESMs).

The VAT relief is being expanded to include new technologies such as electrical battery storage and retrofitted diverters, without allowing the VAT liability to be apportioned where qualifying works are performed as part of wider works. However, this falls significantly short of assisting the social housing sector to benefit from the VAT relief available until 31 March 2027.

In this article, S3TAX Director, Ian Brown, examines this relief and the crucial gap that remains – social housing providers still struggle to benefit.

Practicality of Energy Saving Materials installations

As a reminder, the complexity for the social housing sector which is preventing it from fully benefitting from the VAT relief available is that it is common for the installation of ESMs to be performed as part of a wider project or refurbishment which does not qualify for VAT relief.

A real-world example of this is that I will soon need a new roof for my home and I have been told that if I want to install solar panels then it “makes sense” to undergo all the work at the same time. That it will save time and money, and provide a better end product.

The problem is when a service with many components is delivered under a single contract, it is normally* subject to a single VAT liability of the overarching or principal supply. In most cases this will not be the specific ESM installation and VAT relief will not be obtained.

(*this is a complex determination with an abundance of case law)

For my new roof, if I get all the work done under a single contract, the current VAT rules would mean I pay 20% VAT on it all. But doesn’t that defy the whole point of the VAT relief to help or encourage folk to install solar panels and other ESMs?

This issue is exacerbated for social housing providers who will perform these works on a much larger scale but also need to take care in regard to minimising impact on tenants too. Can a balance of VAT rules v government policy v practicality be found which allows the VAT relief for ESMs to be obtained?

A “sensible approach” to VAT relief on Energy Saving Materials denied

The clock is ticking on the VAT relief and there are only three years left of the five-year window to have ESM installations zero-rated. It is urgent and the social housing sector is engaged.

A preferred solution, requested by the sector, would have been to allow apportionment of costs and for each element to have its own VAT liability applied to it. Using my roof example, I would be able to use a single contractor for my roof, and for the roof replacement element I would pay 20% VAT and for the solar panels and installation, I would pay 0% VAT.

This apportionment is allowed and used in other areas of VAT reliefs. In particular for disability-related adaptions, where it is accepted that the qualifying elements of the work can be split out and have 0% VAT applied to say the construction of a new ramp or the provision of a disabled lavatory.

In our experience this works well and with little complexity. In fact, HMRC’s own internal manuals refer to apportionment under the heading “sensible approach”.

However, this approach of apportionment has not been adopted by government for the VAT relief for ESMs, despite it being acknowledged as being one of the most commonly requested reforms in the CfE.

Is there a way forward?

Most disappointing of all is that it feels that the matter of apportionment has been firmly dismissed and closed as opposed to trying to work towards a solution.

The Government’s reason for not applying the “sensible approach” explained above to ESMs was that “it is a fundamental VAT principle that a single supply carries a single VAT treatment”. It adds that allowing apportionment could “create uncertainty regarding the VAT treatment of all supplies involving multiple components”.

The response does acknowledge there is precedent elsewhere with the disability-related adaptions but that the customers need to provide evidence of eligibility. The zero-rating for disabled-related adaptions is a targeted VAT relief and the administrative burden that the evidential requirements place on consumers, suppliers and HMRC is proportionate. The eligibility declaration is provided here for reference.

The response goes on to explain a VAT relief available to anyone installing a qualifying ESM in a residential or charity building alongside wider building renovations would be much broader. Evidential requirements would be “significantly more burdensome” for consumers to provide and for HMRC to process. Furthermore, it says that given the “unprecedented nature of allowing VAT reliefs to be apportioned on this scale, operationalising such a reform would come at a high cost to HMRC – something that would ultimately be borne by the taxpayer” and not be cost-effective.

However, the Government’s reasons and explanations should not be unsurmountable in finding a solution. For example, the eligibility declaration for disability-related adaptions has not, in my experience, been found to be onerous for any party. And isn’t it just as onerous for HMRC to confirm the installation of ESMs qualifies for zero rating when provided under a separate contract?

It feels as though there should be a way forward to a solution with proper engagement.

Government response to the CfE on reform of the VAT relief for ESMs did not go as far as it could have done for the social housing sector.

If the Government and HMRC want to get a balance of VAT rules v government policy v practicality, which allows the VAT relief for ESMs to be fully obtained, they will need to engage with the sector and work to find a solution that allows apportionment.

Hopefully, they can do so before the scope of zero-rating ends on 31 March 2027 so the opportunity doesn’t pass by.

Here’s where S3TAX can help

Our team of housing sector tax specialists understands the complexities of ESM installations and VAT regulations. We can help you navigate the challenges of bundled works and apportionment, ensuring you claim the full benefit of the relief available.

We work closely with social housing providers to develop practical and cost-effective strategies for maximising VAT savings. We can guide you through the eligibility criteria, documentation requirements, and potential pitfalls to ensure a smooth and successful process.

At S3TAX, we are committed to advocating for the needs of the social housing sector and promoting sensible VAT reforms that support your vital work. We keep you informed about the latest developments and opportunities, ensuring you stay ahead of the curve.

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Ian Brown joins S3TAX as director – read more