Cutting VAT will not boost Green Deal says EU

Published:  25 February, 2013

The European Commission is taking the UK government to court for applying reduced rates of VAT to support the Green Deal.

Last June, the commission started infringement proceedings against the UK for the 5% VAT rate on energy saving materials, such as insulation. It argues the products should carry the standard VAT rate of 20%.

The reduced VAT rate has been operating in the UK for years and industry leaders wrote to the government last August to tell it that quadrupling the rate would “dampen demand” for the government’s flagship Green Deal. In the letter signed by 18 industry organisations, including the Federation of Master Builders, the UK Green Building Council, the Association for the Conservation of Energy, and the British Property Federation, they said it would “make it more difficult for energy saving measures to meet the golden rule” of the scheme. The golden rule states the savings on energy bills must exceed the cost of the measures and finance.

The European Commission argues that reduced VAT rates are often not the best way to achieve policy objectives or change consumer choices. It says that a "reduced rate does not target the population that needs it most, but instead is universally applied."

"In the case of energy efficient products, businesses are likely to represent a large proportion of those wishing to invest in them, in which case the VAT is deductible anyway. It has been shown that frequently reduced rates are not fully passed on to consumers in the form of lower prices.”

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