New VAT rules on Energy Saving Materials

From 1st October 2019 the scope of the VAT reduced rate (5%) for energy saving materials was restricted to comply with EU law.

What is happening and when?

Supplies which would previously have qualified for the reduced rate, now only qualify if they meet the new and more restrictive tests.

The new rules affect installations of energy saving materials made on or after 1st October 2019. Supplies paid for before 1st October 2019, and supplies made to a contract in line with the law before that date, are not included.

What are the changes?

New social policy conditions and 60% threshold

From 1st October 2019, the reduced rate will only apply to the installation of energy saving materials where the supply meets one of the new social policy conditions noted below, or a new 60% test is met in relation to materials.

Who will it affect?

Any contractor or subcontractor installing energy Saving materials including:

  • Controls for central heating and hot water systems Draught stripping
  • Insulation
  • Solar panels
  • Wind turbines
  • Water turbines
  • Ground source heat pumps
  • Air source heat pumps
  • Micro combined heat and power units
  • Wood-fueled boilers

Social Policy Conditions

The supply of the installation is to a ‘qualifying person’ and in the qualifying person’s sole or main residence. A qualifying person is a person who is:

  • Aged 60 or over; or
  • Is in receipt of certain benefits (e.g.) Child Tax Credit (other than the family element), Council Tax Benefit, Disability Living Allowance, Disablement Pension, Housing Benefit, Income-based Jobseeker’s Allowance, Income Support, War Disablement Pension and Working Tax Credit.

New 60% Test

Where one of the social policy conditions is not met, it is required to look at the new 60% test for materials. If the open market value purchase price (excluding VAT) of all goods supplied to the customer is greater than 60% of the total value of the supply to a customer (excluding VAT), an apportionment is required between materials (which will be become standard rated) and labour (which will be reduced rated).

Example:

A contractor pays £500 (excluding VAT) for material and charges its customer £1,000 (excluding VAT) for the installation. Since the cost of materials is only 50% of the value of the total supply, the contractor can charge the reduced rate of 5% on the total supply i.e. 5% of £1,000 = £50.

This article featured in issue 6 of our Manufacturing and Engineering newsletter series, The Engine.

Read The Engine Issue 6

For further advice, please get in touch with a member of our Tax team