The Chancellor announced in the Autumn Statement that the government will consult on legislation for Finance Bill 2016 to ensure the reduced rate of VAT on energy saving materials is maintained in line with EU law.
EU law allows a reduced rate of VAT to apply to (i) the provision, construction, renovation and alteration of housing, but only as part of a social policy; and to (ii) the renovation and repair of private dwellings, but excluding materials which account for a significant part of the service provided. The European Commission brought infringement proceedings against the UK for applying the reduced rate to the service of installation of energy saving materials in residential homes. The Court of Justice upheld the Commission’s complaint on 4 June 2015 and, accordingly, it will not, as a result be possible to maintain the current UK reduced rate. How the UK will maintain any form of reduced rate for such materials may be somewhat complex, bearing in mind the scope of the EU VAT rules. We assume that the current UK reduced rate will continue to be applied until after the consultation and the UK makes the necessary changes to the UK VAT regime.
The implications of this judgement and how HMRC deals with its stated aim of maintaining the reduced rates of VAT, go beyond the immediate case on energy saving materials. It is also relevant to the growing private rented sector and built to rent industry, which would like to have a reduced rate of VAT on maintenance and repairs, which would rely on the same EU directive provisions being applicable.