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Cut VAT and create construction jobs

ImageReducing the rate of VAT to 5 per cent for energy-saving products would be a clear signal of the Government’s commitment to the Green Deal

The 2011 Budget provided this unequivocal pledge: “The Government is committed to the success of the Green Deal and will act to encourage and incentivise take-up so that the Green Deal will appeal to households, businesses and prospective providers alike, before it is introduced in 2012.” In other words, we should expect some exciting new incentives within Budget 2012.

The sales tax, VAT, is the one tax all member states of the EU must raise. Governments are allowed to charge fuel at 0 per cent. But once VAT is on an item, it cannot go below the minimum level of 5 per cent. This is the rate levied on UK domestic fuel ever since 1993, introduced by then-Chancellor Kenneth Clarke on the specific basis that “for the first time the rate of VAT on domestic fuel and power will be the same as that charged on goods which improve energy efficiency. This will bring an end to the current anomaly which makes a nonsense of any attempt to use the tax system to improve the environment.”

Sadly, the anomaly mostly continues. Unless specified, everything else – including energy saving items – is taxed at the full VAT rate (20 per cent). So we have the present absurdity that, for each consumer unable to reclaim VAT, energy conservation measures are now taxed at four times the rate of energy consumption.

Lower rate of VAT

Over the years, campaigners have succeeded in getting a lower rate of 5 per cent charged on a number of energy-saving items – insulation installed by contractors; TRVs; heat pumps; micro-CHP. But not the big-ticket items, like boilers or glazing (nor any form of lighting).

My premise is that everything installed by accredited Green Deal installers – including time-costs – should automatically be taxed at 5 per cent, making energy conservation and consumption taxation for the first time at the same rate. Consequently a Green Deal package that, inclusive of VAT would have cost £12,000 would now cost £10,500. Making it obvious that the Government was forgoing £1,500 solely in order to encourage participation in its flagship scheme.

This benefit would be limited only to installers who are accredited to the Government flagship programme, thus both providing consumer assurance and disadvantaging the cowboys.

Annex 3 of the latest (2006) VAT directive states categorically in paragraph 10 that the 5 per cent rate is permitted only for the ‘provision construction renovation and alteration of housing provided as part of a social policy’. Paragraph 15 states that “supply of goods and services” must be “by organisations recognised as being devoted to social wellbeing.” Given the enormous social and ecological benefits of making our buildings energy efficient, both those requirements certainly apply to all those carrying out Green Deal-accredited installations.

One of the traditional stumbling blocks to VAT equalisation was that relevant measures needed to be installed by trained contractors i.e. no DIY – and there was no definition of training or accreditation. Despite this, for many years there was an overt VAT reduction option offered to governments to create construction industry jobs. (Unlike others, the UK government never took this up, although it was required to do so on behalf of the Manx Government).

Trained contractors are precisely what the Green Deal is centred around. That stumbling block can at last disappear.

No discrimination

Previously some tried to argue it breached the old directive to reward even the most efficient measures, because VAT should not discriminate between directly competing products. But as microCHP directly competes with conventional boilers, this is obviously specious. To avoid rewarding mere compliance with mandatory standards, the 5 per cent rate should only apply to measures more energy efficient than those required under Building Regulations ( e.g. A or B for windows, A for condensing boilers).

This VAT package would provide a very outward and visible sign of government’s commitment to the Green Deal. While I don’t think this market is anything like as price responsive as certain economists suggest (which is why I cannot get terribly exercised about Green Deal interest rate charges), I do know that saving tax money is far more of a consumer motivator than saving “normal” money: witness inter alia the success of Climate Change Agreements.

Of course there will be some hard luck stories from companies who specialise in, say, installing kitchens or bathrooms, still charged at 20 per cent – although again it would be an incentive for them to get staff qualified to work on Green Deal. Of course this will only be relevant to householders (sadly not to others unable to pass on VAT, like the entire public sector, charities and certain financial institutions, like banks, insurance companies etc).

In the immortal words of climate change minister Greg Barker, altering VAT rates would be “a real game-changer” for the prospects for the Green Deal in the residential sector. And because installing measures would be generating construction industry business which would otherwise not take place, a prospective nice-little-earner for the Treasury.

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