The Value Added Tax Act 1994 was amended on 1 February 2024 to widen what counts as installing a heat pump for the purposes of the reduced VAT rate on energy-saving materials. The change was made by The Value Added Tax (Installation of Energy-Saving Materials) Order 2024 (S.I. 2024/24), which inserted new notes into Group 2 of Schedule 7A1.
The inserted wording states that "installing energy-saving materials" includes carrying out groundworks, or dredging a body of water, in order to install pipework or other equipment necessary for the operation of a ground source heat pump or a water source heat pump1. The same order inserted a definition of water source heat pumps into the list of qualifying materials, and renumbered the existing definition paragraph1.
Group 2 covers "relevant supplies of services of installing energy-saving materials" in residential accommodation or a building intended for use solely for a relevant charitable purpose, and supplies of those materials by the person who installs them1. The qualifying materials listed in the schedule include ground source heat pumps, air source heat pumps and water source heat pumps, alongside insulation, draught stripping, heating and hot water controls, solar panels, micro combined heat and power units, boilers fuelled solely by wood, straw or similar vegetal matter, electrical storage batteries and smart diverters1.
The schedule's heading now reads "Group 2, Installation of energy-saving materials from 1st April 2027", a substitution made on 1 May 2023 by The Value Added Tax (Installation of Energy-Saving Materials) Order 2023 (S.I. 2023/376)1. The same 2023 order substituted Items 1 and 2 and omitted Item 31. The 2024 order also substituted words in Items 1 and 21.
The listed qualifying materials are:
| Category | Items named in Group 2 |
|---|---|
| Insulation and draught proofing | Insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings; draught stripping for windows and doors |
| Controls | Central heating system controls (including thermostatic radiator valves); hot water system controls |
| Generation | Solar panels; micro combined heat and power units; boilers designed to be fuelled solely by wood, straw or similar vegetal matter |
| Heat pumps | Ground source heat pumps; air source heat pumps; water source heat pumps |
| Storage and diversion | Electrical storage batteries within sub-paragraph (2); smart diverters |
An electrical storage battery qualifies only if it is intended for use solely for storing energy converted from electricity supplied to the residential accommodation or building in question, or generated by a microgeneration system1. A smart diverter is defined as a device capable of automatically diverting electricity generated by a microgeneration system to one or more appliances, in particular circumstances1. A microgeneration system is equipment that generates electricity and is itself an energy-saving material for the purposes of the Group1.
Residential accommodation is defined in the notes as a building, or part of a building, that consists of a dwelling or a number of dwellings, or a building, or part of a building, used for a relevant residential purpose1.
Why it matters for households
For a home considering a ground source heat pump, a large part of the cost is not the unit but the ground loops and boreholes that carry heat to and from the ground, or the equivalent for a water source heat pump. Treating those works as part of the installation brings them within the same VAT treatment as the equipment itself, rather than leaving them as a separate service. The same applies to shared arrangements, where several homes draw on one buried loop, described in shared ground loop networks.
The wider list matters because a heat pump is rarely installed alone. Controls, cylinders and storage all appear in the schedule, and the site's heat pumps hub covers how these parts fit together. Households weighing a ground loop against an air source heat pump may find the balance shifts when the excavation is treated as part of the installation rather than as separate building work.
What happens next
The schedule heading refers to Group 2 from 1 April 2027, and the page records that changes may be brought into force at a future date. A temporary modification of Schedule 7A Part 2 Group 1 by S.I. 2026/987 is listed as not yet applied1. No further detail on those future changes appears in the amended text.
Sources1 cited
- Value Added Tax Act 1994, legislation.gov.uk