Reduced VAT for energy-saving materials

Last updated: 28 November 2019

In 1998 the UK Government introduced a reduced value-added tax (VAT) rate of 5% (down from 17.5%) for the grant-funded installation of certain energy-saving materials (ESMs) in the homes of elderly, less well off and vulnerable households. This reduced VAT rate applied to all insulation, draught stripping, hot water, and central heating controls. In Budget 2000, the Government extended this scheme to all households, even if the service is not grant funded. Budget 2000 and 2002 also introduced further reduced VAT rates for ESMs when they are part of grant-funded installations into vulnerable households  including central heating systems, heating appliances, and factory-insulated hot water tanks. The 2004 Budget announced reduced VAT for ground source heat pumps, and the 2005 Budget extended this to air source heat pumps. The 2005 and 2006 Budgets also announced reduced VAT to encourage microgeneration technologies for use by individual households. These include small wind turbines, solar panelsand microcombined heat and power (CHP) units. The 2007 Budget further confirmed this commitment to maintaining reduced VAT for microgeneration technology. Following EU rulings,the Government is consulting on the scope of the reduced rate. It will remain fully available (except on wind and water turbines) for supplies of services of installing energy-saving materials in residential accommodation where the supply is made to a qualifying person (a person who is aged 60 or over or is in receipt of certain benefits) or to a housing association or where the residential accommodation is a building or part of a building used solely for a relevant residential purpose. Otherwise, the reduced rate will be available (except on wind and water turbines) provided that the value of the energy-saving materials does not exceed 60% of the total value of the supply of installing the energy-saving materials. If the value of the energy-saving materials exceeds 60%, then only the labour cost element will qualify for the reduced rate (with the supply of the materials being standard rated).

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