The Court of Justice of the European Union last week ruled that the UK will no longer be able to offer a reduced 5% rate of VAT on energy-saving products for homes – a decision that drew an angry response from the Energy Saving Trust and insulation products manufacturer Knauf.
A statement from the EU court read: “The United Kingdom cannot apply, with respect to all housing, a reduced rate of VAT to the supply and installation of energy-saving materials, since that rate is reserved solely to transactions relating to social housing.”
At present a rate of 5%, rather than the standard 20%, tax is paid on many energy efficient or carbon-cutting products for domestic use including: controls for central heating and hot water systems; draught insulation; wall, floor, ceiling, and loft insulation; solar panels; wind turbines; ground-source heat pumps; air-source heat pumps and wood-fuelled boilers.
David Weatherall, policy expert at the Energy Saving Trust, told The Guardian: “This a huge backwards step and we have fully supported the UK’s fight to maintain a low rate of VAT on energy-saving products.
“Cold homes is no niche issue. It is a widespread problem. Our research shows that nearly 40% of households are not warm enough in winter. At the same time the UK is going through a solar revolution with millions of homeowners taking advantage of green energy, but an increase in VAT could bring our progress in this area to a grinding halt.”
Ashley Fox, leader of the Conservative Party in the European Parliament, also believes that the judgement “defies common sense”. He told Euractiv: “People will be aghast when they see the EU on the one hand hectoring member states about carbon reduction while on the other handing down judgments like this.”
Infringement proceedings were brought against the UK as the European Commission believed that the 5% reduced rate broke the VAT Directive, as it could only apply to transactions related to social housing.
Although the UK government argued that the reduced rate was a social policy, the court disagreed: “While it is true, as asserted by the UK, that a policy of housing improvement may produce social effects, the extension of the scope of the reduced rate of VAT to all residential property cannot be described as essentially social,” a statement from the Court of Justice read.
In a blog posting, John Sinfield, managing director of Knauf Insulation Northern Europe, described the decision as “nonsensical” and a “triumph of process over purpose”.
He pointed out that consumption of energy will still be charged at a reduced rate of 5%: “That’s worth repeating: the consumption of energy is charged at 5% VAT while the measures that allow householders to permanently reduce the need for that energy are charged at 20%.”
Sinfield argued that, in the light of a forthcoming referendum on EU membership, the ruling would prove a challenge both to the “Brexit” argument and the “better together” camp.
“Ironically, much of what had come out of the EU to date on energy efficiency pushed in the right direction. The recent Energy Efficiency Directive placed a requirement on member states to produce a long-term plan to address the wasted energy in their building stock.
“Long-term thinking was sorely missing in UK energy efficiency policy over the last parliament as grand plans in the Green Deal and ECO stumbled and hastily designed sticking plaster policies surpassed even previous schemes for their boom-bust short-term nature.
“So for the separatists wishing to bring powers back to these shores, they must set out their mechanism for embedding long-term planning into short-term parliaments because, from a narrow energy efficiency perspective at least, much of the recent focus on long-term thinking has come from the EU.
“And, for the better together camp, given yesterday’s ruling, what’s the new mechanism for avoiding nonsensical decisions that fundamentally undermine stated goals?”
