VAT and Energy-Saving Materials consultation responses

HMRC have published responses to their call for evidence 'VAT energy saving materials relief – improving energy efficiency and reducing carbon emissions'. A variety of responses were received and an extension to the relief is planned.

 A total of 125 written submissions to the call for evidence were received:

• There was considerable support for including the retrofitting of batteries to store electricity generated by solar panels, wind turbines and water turbines within the relief.
  • Support was also evident for adding batteries as a standalone technology connected to the National Grid.
• Respondents suggested the inclusion of several other technologies, including:
  • The installation of water-source heat pumps, these being similar technology to air and ground-source heat pumps which currently qualify.
  • Diverters retrofitted to Energy-Saving Materials (ESMs), which allow households to use excess energy generated by their ESM to power other appliances in their home, rather than exporting it back to the grid.
  • Non-residential solar panels for installation in car parks or solar farms.
  • Technologies with some energy-saving qualities, but reliant on fossil fuels to work, such as high-recovery hot water cylinders, radiant and infrared heating, hybrid heat pumps and heat interface units.
• Some respondents argued that wood-fuelled boilers should no longer benefit from the relief, owing to the negative impact they can have on air quality.
  • The valuable role that these technologies play in rural, off-grid, areas was noted. In such locations, options for sustainable heating sources are more limited.
• All respondents who addressed reinstating relief for the installation of qualifying technologies in buildings intended for use solely for a relevant charitable purpose were in favour of the proposal.
  • It was suggested that this relief could make a material difference to the speed at which charities can install ESMs. 
• There were a variety of miscellaneous suggestions for making the relief more effective and efficient. These included adding groundworks for the installation of heat pumps to the relief and extending the relief's 31 March 2027 sunset date.

 Options discounted

• The government concluded not to bring ‘thermal storage’ within the scope of the relief.
  • Not all ‘thermal storage’ products meet the objectives for the relief and there was a lack of independent data regarding the efficiency of such technologies.
• It was not appropriate to bring technologies not typically installed in residential buildings within the relief. 
  
  • It was also considered unlikely that such technologies would be installed in buildings used solely for relevant charitable purposes.
• Although technologies, where the primary purpose is not to save energy or reduce carbon emissions, do play a part in reducing a household’s energy consumption, they do not meet all objectives of the ESMs relief and so should not be included. 
  • The same was true of technologies that have some energy-saving qualities, but remain reliant on fossil fuels to work. 
  • Including these within the relief may incentivise take-up of inefficient systems, such as gas boilers. This would be contrary to the objectives of the relief.  
• Wood-fuelled boilers will remain in the scope of the ESMs relief, but the government will undertake further analysis of the impacts of this technology and continue to consider the position.

Proposed changes

It is intended that from 1 February 2024, ESMs VAT relief will be extended to include:

• Electrical battery storage (either retrofitted to a qualifying ESM or installed as a standalone technology connected to the grid).
• Water-source heat pumps.
• Diverters retrofitted to ESMs such as solar panels and wind turbines.
• The installation of ESMs in buildings used solely for a Relevant charitable purpose.
• Groundworks necessary for the installation of certain types of heat pumps.
  • This will allow all aspects of the installation of ground-source and water-source heat pumps to benefit from the relief, even where the activities are co-contracted.

These changes to ESMs will be permanent. When zero rating ends on 31 March 2027, the installation of all ESMs in the scope of the relief will revert to the reduced rate of VAT at 5%.

The government retains its discretion to extend the zero rate beyond its 2027 sunset date, but will only make a decision when it has a clearer sense of the post-2027 fiscal picture.

Useful guides on this topic

Energy-Saving Materials
The supply and fitting of energy-saving materials in residential accommodation attracts the zero rate of VAT. What does it apply to? What are the qualifying conditions? What case law is there on this topic?

Land & Property: Relevant residential & relevant charitable purpose
What are the VAT rules for land and property that is used for a relevant residential purpose or a relevant charitable purpose? What are the clawback provisions affecting a change of ownership or use?

Autumn Statement 2023: VAT
The Chancellor announced the following measures on VAT in his 2023 Autumn Statement.

External link

Call for evidence: VAT energy saving materials relief – improving energy efficiency and reducing carbon emissions