Last June, the European Commission sent a reasoned opinion to the UK requesting it to amend its legislation that allows a reduced VAT rate for the supply and installation of energy-saving materials. According to the European Commission, the UK’s reply “was not satisfactory”, hence it has recently decided to refer the UK to the ECJ over reduced VAT rate on the supply and installation of energy-saving materials.
Aiming at reducing the costs of installing energy-efficient products, the UK Treasury applies a five per cent rate of VAT, instead of 20 per cent, on some of these products. The reduced VAT rate for energy saving materials is a key part of the "Green Deal", the Government’s initiative to improve the energy efficiency of buildings. It is therefore important to recall that the European Commission approved, a few weeks ago, as being in line the EU state aid rules, the Government aid to the Green Deal’s measures. According to Joaquin Almunia, the Commissioner for Competition, "The UK Green Deal allows consumers and businesses to improve the energy efficiency of their buildings without making huge upfront investments.” Moreover, he said, “This is another example of how our policy of state aid control can support private investment in energy saving and enhance competition at the same time."
The Commission has noted “that the reduced VAT rate for energy saving materials has been linked to the UK's "Green Deal" to improve the energy efficiency of buildings” nevertheless, although it “supports the objectives of the UK Green Deal” it “does not believe that breaking EU VAT rules will help in achieving these objectives.” As Martin Callanan, MEP, said, "The Commission cannot propose stringent and growth-hampering environmental legislation on one day, and then demand we drop a major scheme aimed at reducing energy use the next."
According to the European Commission, the UK's application of a reduced rate on energy saving materials, “goes beyond the scope allowed under the VAT Directive.” The Commission recalled that Member States are solely allowed to apply reduced VAT rates to a limited number of goods and services used in the housing sector, as specified in the VAT Directive Annex III. The Commission has stressed that a reduced rate for energy saving materials can be applied if they are used for social policy purposes in the construction, renovation and alteration of housing but not for the supply and installation of these materials.
Moreover, it pointed out that the VAT Directive has no specific provision allowing a reduced VAT rate on energy saving materials thus universal application of a reduced rate for these materials is not allowed. Consequently, according to the Commission, the UK's application of a reduced VAT rate to all energy saving materials contravenes EU legislation.
According to the Commission a reduced VAT rate is not "the most efficient way” to promote energy efficiency, as “it is difficult to define precisely these products” and it “does not target the population that needs it most, but instead is universally applied.” The Commission believes that direct subsidies are “more efficient, ways of promoting energy efficient materials while remaining in line with EU law”. However, as argued by Jenny Holland, the head of parliamentary affairs for the UK Association for the Conservation of Energy, seeking to limit CO2 emissions from buildings could be considered, in itself, a form of social policy as well as ensuring “that fuel bills are not punitive for the population at large, or the most vulnerable sectors”.
The Government has not complied with the Commission’s reasoned opinion, as it has refused to scrap the reduced VAT rate for energy saving materials. The Government believes that this measure is essential to its Green Deal energy efficiency programme to achieve success.
According to a treasury spokesperson "We remain of the view that the reduced rate for ESMs within residential buildings is within the scope of what is allowed under the VAT Directive”. However, the European Commission has stressed, that the list of goods and services that may benefit from a reduced VAT rate must be “strictly applied, with no room for manoeuvre or interpretation.” Hence, it has decided to bring the case before the Court of Justice. If the Court rules against the UK, the Government would be required to scrap the reduced VAT rate for energy saving materials. The ECJ may fine the UK if it fails to bring national legislation into line with EU legislation.
