The five per cent VAT rate on domestic renewable energy heating installations could be under threat thanks to the pronouncement from The European Court of Justice that this reduced rate VAT is illegal.
Michael, of Blubberhouses-based Yorkshire Heat Pumps, said: “This judgment could have an adverse effect on the pockets of UK consumers and hurt companies like ours which promote uptake of renewable technologies.”
The European Commission first ordered the UK to drop this tax break in 2013, because, it said, the policy does not comply with the EU’s VAT Directive. The basis of the UK Treasury’s appeal later that year was that upgrading homes not only saves emissions and boosts energy efficiency, but also has wider social benefits that justify the reductions.
However, last week the European Court of Justice (ECJ) ruled the reduced VAT rate could only apply to transactions related to social housing. What’s more, the UK will face weekly fines unless it changes the rules.
Said Michael: “What makes this doubly bonkers is the fact that the UK has legally binding carbon reduction targets to hit and will face heavy penalties if they are missed. This latest ruling could make that all the more likely.
“The government has introduced a range of measures to help us hit these carbon targets, including the domestic Renewable Heat Incentive scheme, which offers financial incentives to people making the switch from fossil fuels, and the tax break of reduced rate VAT on the equipment, from the standard 20 per cent to five per cent. Now, in light of this ruling, it looks increasingly likely there will have to be a VAT rise in the foreseeable future.
“While self-builders will still be able to benefit from the reduced rate, other homeowners won’t, making these technologies more expensive to install and no doubt suppressing uptake.
“Whatever the precise timing of the rise, the sooner people thinking of switching to renewables actually make the change, the more money they will be likely to save – the effect of paying 15 per cent more VAT on a boiler could run into thousands of pounds depending on the size of boiler.”