BMF comment: European court ruling hits UK 5% VAT rate

Published:  08 June, 2015

The European Court of Justice (ECJ) has ruled that the UK contravened the EU VAT Directive in applying a reduced VAT rate to the supply and installation of energy-saving materials.

The ruling affects insulation, central heating and hot water system controls, heat pumps, solar photovoltaic and solar thermal panels, and wind and water turbines. The Court ruled that these technologies could no longer enjoy a 5% rate to increase the uptake by homeowners and landlords. Instead, they must be charged at the standard 20% rate.

For three years, the Builders Merchants Federation (BMF) has repeatedly urged Whitehall to stand firm and defend the 5% VAT rate since the European Commission referred the UK government to the European Court of Justice in the summer of 2012.

Commenting on the case, John Newcomb, managing director of the BMF, said: “BMF members are directly affected by this unwelcome judgement because businesses we represent make and deliver the materials and products involved. I am very disappointed the European Court has overturned the merits of having a reduced rate aimed at encouraging people to improve the thermal performance of their home. UK housing stock is among the least energy-efficient in Europe and this flies in the face of a valid incentive to increase the rate of improvement.

“Losing this case has major repercussions for BMF members. Ministers are compelled to change UK law to enforce the EU Directive. It will scupper energy-efficiency policies like the Green Deal and the Energy Company Obligation and make home insulation more expensive due to higher VAT.”

Mr Newcomb pointed out that elevating VAT to the standard 20% rate will affect the Golden Rule calculation and cause many Green Deal energy-saving projects to become financially unviable.

Only last week (1 June), the BMF wrote to the government again to urge Ministers to stand firm against Brussels and defend current arrangements. At the General Election, the Conservatives pledged not to raise Income Tax, National Insurance or VAT in the next five years. Losing this legal action means the new government faces the prospect of having to put VAT up from 5% to 20%.

Mr Newcomb concluded: “We wait to see how Ministers will interpret and react to this judgement. They may decide that only social housing tenants can benefit from energy-saving improvements using inputs supplied at the 5% rate. If so, it will mean owner-occupiers will end up paying VAT at the higher 20% rate.”

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