Wind and water turbines added to qualifying ESMs and 60% test removed

The Value Added Tax (Installation of Energy-Saving Materials) Order 2023 extends the temporary zero rate of VAT for the installation of qualifying energy-saving materials (ESMs) in residential accommodation in Northern Ireland from 1 May 2023 to 31 March 2027, aligning its treatment with Great Britain¹. The instrument, laid by HM Revenue and Customs on behalf of HM Treasury, also permanently adds wind and water turbines to the list of qualifying ESMs and permanently removes the social policy conditions and the 60% test¹.

The 2019 changes had limited the reduced rating of ESM installations to supplies meeting certain social policy conditions, or where the cost of materials did not exceed 60% of the total value of the supply, the "60% test". Where those conditions did not apply, businesses had to apportion supplies and account for VAT at the reduced rate on the service element and the standard rate on the goods element. Wind and water turbines were excluded from the qualifying list¹.

"Wind and water turbines will also be permanently added to the list of qualifying ESMs and the social policy conditions and 60% test permanently removed."

The zero rate applies in Northern Ireland from 1 May 2023 to 31 March 2027. A sunset clause means it reverts automatically to the reduced rate after 31 March 2027 across the whole of the United Kingdom unless further legislation extends the end date¹. The instrument amends Schedule 7A and Schedule 8 to the VAT Act 1994, and its extent and territorial application are the United Kingdom¹.

HMRC states it was not possible to consult in the time available, and that it will update its guidance shortly after the measure is introduced¹. It will monitor the relief through normal audit activity and regular communication with affected taxpayer groups¹. The memorandum states the impact on businesses installing ESMs in Northern Ireland is beneficial, as they will no longer need to consider the social policy conditions or perform calculations to determine whether an installation qualifies, and from 1 May 2023 to 31 March 2027 will not be required to charge and account for VAT on their supplies while still recovering input tax¹. It adds that, in so far as the relief is passed on to consumers, it should boost demand for installation of ESMs in residential property¹.

Why it matters for households

For a household considering a wind or water turbine, the permanent addition to the qualifying list removes a barrier that had excluded these technologies since 2019¹. The removal of the 60% test and the social policy conditions means eligibility no longer turns on the split between materials and labour, or on meeting social criteria, which the memorandum says reduces administration for installers¹. Whether the relief reaches a household depends on whether it is passed on, which the memorandum describes as a possibility rather than a certainty¹. Anyone weighing a hydro scheme may also need to consider whether an environmental assessment applies, and turbine owners have faced manufacturer failures before, as with the Proven Energy wind turbines collapse. The wider context sits in the other-generation hub, and VAT treatment interacts with the tariffs hub where export payments are concerned.

What happens next

The zero rate runs to 31 March 2027, after which the reduced rate applies across the United Kingdom unless further legislation extends the end date¹. HMRC will update its guidance shortly after the measure is introduced¹. A Tax Information and Impact Note covering the instrument is to be published on the government's website¹.

Sources1 cited

1. The Value Added Tax (Installation of Energy-Saving Materials) Order 2023, legislation.gov.uk