The government received 125 responses to its Call for Evidence on VAT relief for energy-saving materials and published a summary of responses on 11 December 2023, according to the explanatory memorandum to the Value Added Tax (Installation of Energy-Saving Materials) Order 20241. The memorandum states that ministers considered the responses and that the resulting legislation is a direct result of them, with the reforms announced at Autumn Statement 20231.
The order expands the relief provided for by Group 23 of Schedule 8 and Group 2 of Schedule 7A to the Value Added Tax Act 19941. It reinstates relief for the installation of qualifying materials in buildings used solely for relevant charitable purposes, such as village halls or similar community recreational facilities, a relief removed in 2013 because it was not compatible with EU law1. It adds electrical batteries that store electricity generated by certain energy-saving materials and from the National Grid, water source heat pumps, and diverters that let excess electricity from certain materials be used in the qualifying building rather than exported to the grid1. It also adds certain preparatory groundworks needed for ground and water source heat pump installation, which the memorandum says are typically contracted to a different supplier from the one installing the heat pump for insurance reasons1.
The changes took effect on 1 February 2024 and apply across the United Kingdom, with the memorandum stating that the Windsor Framework allowed earlier changes to be extended to Northern Ireland from 1 May 20231. The relief is a temporary zero rate running until 31 March 2027, after which installations revert to the reduced rate of 5 per cent from 1 April 20271. HMRC said it would update its guidance when the measure was implemented on 1 February 20241.
"The SI will reinstate the relief for the installation of qualifying ESMs in buildings used solely for relevant charitable purposes, such as village halls or similar recreational facilities for the community"
The technologies already covered before the change were insulation, central heating system controls, hot water system controls, solar panels, wind turbines, water turbines, ground source heat pumps, air source heat pumps, micro combined heat and power units and wood-fuelled boilers1. The order adds to that list:
| Added by the order | Detail |
|---|---|
| Electrical batteries | Storing electricity generated by certain energy-saving materials and from the National Grid1 |
| Water source heat pumps | Added to the qualifying list1 |
| Diverters | Enabling excess electricity from certain materials to be used in the qualifying building rather than exported1 |
| Preparatory groundworks | Necessary for ground and water source heat pump installation1 |
On small businesses, the memorandum states that no specific action is proposed to minimise the impact of the requirements on businesses employing up to 50 people, on the basis that the changes reduce the administration associated with the relief1. It adds that affected businesses will no longer charge and account for VAT from 1 February 2024 until 31 March 2027 and will then account only for the reduced rate of 5 per cent, while still recovering input tax on the costs of making those supplies1. The memorandum says that in so far as the VAT savings are passed on to consumers, demand for affected installations should rise1.
Why it matters for households
The rate a householder pays on installing qualifying measures depends on the date and the technology. The VAT relief on energy-saving materials is a temporary zero rate until 31 March 2027, then 5 per cent, so the same installation can carry a different VAT treatment depending on when it is carried out1. Which measures qualify has now widened, with batteries, water source heat pumps, diverters and certain groundworks brought into scope, so more of a home's generating and storage equipment can fall under the relief1. For a household weighing up storage or a heat pump, the relief applies to the installation of qualifying materials rather than to the equipment alone, and the memorandum notes that savings reach consumers only if businesses pass them on1. The end date of the zero rate is fixed in the legislation, and the memorandum records no proposal to extend it1.
What happens next
The measure was implemented on 1 February 2024, with HMRC updating its guidance at that point1. The zero rate runs to 31 March 2027, after which qualifying installations are charged at 5 per cent from 1 April 20271. A Tax Information and Impact Note covering the instrument was to be published on GOV.UK1. Monitoring is through regular communication with affected taxpayers and normal auditing activities, and the instrument carries no statutory review clause1.
Sources1 cited
- The Value Added Tax (Installation of Energy-Saving Materials) Order 2024, legislation.gov.uk