0% VAT on the installation of energy saving materials: what it all means
Some of you may be aware that the Chancellor announced a change to the VAT rate on energy saving materials (ESMs) during the Spring Statement in March 2022. But what does it all mean?
This article is being issued as guidance following questions from some of our customers on the rate of VAT that we charge on ESMs.
Insulation Express’ current position
We currently charge UK VAT at the standard rate on ESMs, which is 20%. The changes made by the Chancellor only apply to businesses that already charge the reduced rate of VAT at 5% on ESMs, bringing the VAT rate down to 0% for the next 5 years. Those businesses already benefiting from the reduced rate are those that both supply and install ESMs.
As Insulation Express does not install ESMs we don’t fall into this regime and have to charge VAT at the standard rate.
0% VAT on the installation of ESM explained
Businesses that provide and install ESMs are currently able to charge a reduced 5% rate of VAT on these supplies provided certain conditions are met. ESMs include a range of energy saving technologies but this note considers home insulation only.
Under the current legislation, the reduced 5% rate of VAT can be applied to the installation of ESMs in dwellings or other buildings used for a “relevant residential purpose” when certain “social policy conditions” are satisfied (supplies to persons aged 60 or over or in receipt of certain benefits, housing associations or installations in accommodation used solely for a relevant residential purpose) or where the cost of the ESM does not exceed 60% of the total value of the supply.
If the cost of the ESM exceeds 60% only the labour cost element qualifies for the reduced rate (with the materials standard rated at 20%).
The reduced rate does not apply to any supplies by Insulation Express that provide only materials, such as insulation board, not installation services themselves. However, the reduced rate can be charged by those customers of Insulation Express who provide installation services, provided the conditions are met.
What are the changes?
· For a 5 year period from 1 April 2022 until 31 March 2027, the rate of VAT on qualifying supplies will be reduced from 5% to 0%.
· The social policy conditions and the 60% test will be removed permanently.
Due to the Northern Ireland Protocol, the rate of VAT due on installations in Northern Ireland will remain unchanged until the relief can be introduced UK-wide.
What will be the impact of the changes?
The measures are intended to incentivise the take-up of ESMs in line with the government’s net zero objectives.
Individuals, households and families should be positively impacted through lower prices charged by ESM installers, subject to the degree to which these businesses pass the VAT savings on to their customers.
The changes will benefit businesses that install ESMs as they will no longer need to consider the social policy conditions or perform calculations to determine whether or not the installation qualifies for the relief. For a time-limited period, they will also no longer be required to charge VAT but will still be able to recover input tax in relation to these supplies.
Which materials are covered by the reduced rate?
- Controls for central heating and hot water systems
- Draught stripping
- Solar panels
- Wind turbines
- Water turbines
- Ground source heat pumps
- Air source heat pumps
- Micro combined heat and power units
- Wood-fuelled boilers
More information on the 0% VAT changes and who exactly it affects can be found on the government’s website.
Why should you insulate your home?
Now that you’re fully aware of the changes to the 0% VAT rate, you may wonder why you should ensure your home is fully insulated. Well, there are plenty of benefits to roof, floor and wall insulation, including:
1. Insulation reduces the cost of heating and cooling your home by over 40%.
2. Your home is much more comfortable all year round. In winter, insulation stops heat from leaving the building. In summer, it keeps the home cool and stops heat from entering the building.
3. It essentially pays for itself in around five to six years.
4. With less energy used, there’s a reduction in greenhouse gas emissions, which makes your home much more energy efficient.
5. Condensation, mould and damp are reduced.
6. Acoustic insulation also allows you to cut out unwanted sound both entering and leaving the home.