VAT relief for the installation of energy saving materials

UK Government sets out regulations that confirm the additional energy-saving materials that will qualify for VAT zero-rating on installation, from 1 February
solar panels

When energy-saving materials (ESMs) are installed, a reduced VAT rate (5%) is usually applied. However, there is a temporary zero rate of VAT which applies until 31 March 2027, after which the rate will revert to the reduced rate.

Last year, the government consulted on extending VAT zero-rating on ESMs to additional technologies in residential buildings, such as battery storage. The CLA supported this change, and in our response, we suggested additional technologies this relief could be extended to.

In the 2023 autumn statement, the UK Government confirmed that VAT relief would be extended but did not confirm the finer details. It has now laid regulations before Parliament to extend the relief from 1 February 2024.

New qualifying energy saving materials

We are now able to confirm that the following items have been added to the list of qualifying energy-saving materials:

Electrical battery storage

This includes the installation of batteries that are retrofitted to store power generated by energy saving materials (such as solar panels or wind turbines) and are installed as a standalone technology connected to the national grid.

Retrofitting battery storage will enable households to store energy generated by their solar panels for later use, thus avoiding the need to draw electricity from the grid at peak times. If a standalone battery is installed, you will then be able to use this storage to benefit from variable tariffs that allow you to buy electricity when it is cheaper and use the stored energy in your home at times of high demand (typically 4-7pm) when tariff prices are higher.

Water source heat pumps

The relief is extended to these water-source heat pumps as there are similarities between this technology and air source and ground-source heat pumps.

Smart diverters

That are retrofitted to energy saving materials such as solar panels and wind turbines.

This technology will enable the retention of energy within a qualifying property for which it is generated rather than it being exported to the grid. Smart diverters also enable connections to other renewables, which allows for optimum usage of green energy being generated.

Buildings used for relevant charitable purposes

The consultation last year also sought views on reinstating the VAT relief to the installation of qualifying energy saving materials in buildings used solely for relevant charitable purposes. The relief for buildings used for charitable purposes was previously available until August 2013 when it was removed so that the UK could comply with EU law.

The government has now confirmed that it is reinstating this relief so that charities will be able to benefit from this when they have ESMs installed in qualifying buildings. As we have members that operate charities, the CLA supported this latest change.

The term “relevant charitable purpose” is defined as “use by a charity otherwise than in the course or furtherance of business”. However, an extra-statutory 5% de minimis threshold is applied to the word “solely”, meaning that, providing a building is 95% used for non-business purposes, it is deemed a qualifying building. It has been confirmed that this is intended to cover buildings such as village halls or similar recreational facilities run for the community (for example, sports pavilions, church halls and community centres).

Extension of relief to groundworks

The government has also taken the opportunity to extend the relief to the preparatory groundworks necessary for the installation of ground and water source heat pumps. It recognised that such work is often undertaken by a separate supplier for insurance reasons. Prior to this change, there were two independent supplies – one of the ground works and one for the installation of the installation of ground and water source heat pumps, only the latter had qualified for this VAT relief. The only groundworks that qualify for the relief are those such as the digging of trenches or dredging a body of water, in order to install pipework or other equipment necessary for the operation of a ground source or water source heat pump.

If any qualifying groundworks are undertaken after 1 February, you should ensure that VAT is not charged on the invoice for this supply as the general principle is that you cannot recover input tax VAT that has been wrongly charged. If this happens, please ask the contractor to reissue their invoice.

The VAT Notice 708/6 -Energy-saving materials and heating equipment will be updated after 1 February to reflect these legislative changes. Please reach out to the CLA tax team if you any questions about this for your business or property.

Key contact:

Louise Speke
Louise Speke Chief Tax Adviser, London