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VAT challenge could harm Green Deal prospects

Should energy-saving products be subject to the full 20 per cent rate of VAT? The UK and the European Commission are set to do battle in the courts

Next spring a case will be heard in the European Courts. The result could seriously damage the prospects for the government’s flagship Green Deal programme. This would increase the costs of installing many key energy-saving measures and by doing so, render many potential packages simply too expensive to undertake.

Under the Golden Rule, the costs of installing any package of improvements funded by Green Deal Finance must be capable of being repaid during the lifetime of the loan. To qualify, calculations are made, valuing potential consequent reductions in energy consumption at its present price against the costs of measures installed (plus interest). Monthly loan repayments must be more than matched by putative energy savings. If on paper this cannot be shown to be profitable to the householder, no loans will be able to be made.

If the European Court of Justice rules against the UK government, then the cost of installing a whole range of familiar energy-saving items – thermostatic radiator valves, microgeneration, and every kind of insulation installed by contractors – will increase overnight by a whopping 15 per cent. That includes the costs of installation, as well as the costs of materials.

Expanded the list

At issue is the rate at which Value Added Tax is charged upon the cost of buying and installing these measures. Ever since the turn of the century, the UK government has gradually expanded the list of energy-saving devices that qualify for lower rate VAT. In large part, this intervention was motivated by concern that it was iniquitous to tax energy consumption at a lower rate than that on energy conservation. As the rate on electricity and gas consumption has long been set at 5 per cent, it was deemed appropriate to reduce the levels for energy conservation to the same level.

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