VAT ESM relief reforms to be implemented on 1 February 2024

HM Revenue & Customs has confirmed that reforms to the VAT relief on energy-saving materials (ESMs) will take effect on 1 February 2024, following a Call for Evidence that ran from 23 March to 31 May 2023 and drew 125 written submissions¹. The government set out its response in a summary of responses published on 11 December 2023¹.

The relief is being expanded to bring three further technologies within scope: electrical battery storage, water-source heat pumps, and diverters retrofitted to ESMs such as solar panels and wind turbines¹. Battery storage will qualify both when retrofitted to a qualifying ESM and when installed as a standalone technology connected to the grid¹. The Call for Evidence received 63 responses supporting relief for batteries retrofitted to ESMs and 60 for standalone batteries, with no negative responses¹. Water-source heat pumps drew 10 responses proposing inclusion, and the government concluded they are a logical extension given their similarity to air-source and ground-source heat pumps, which are already in scope¹.

"The government will be expanding the relief by bringing the following technologies within scope: electrical battery storage, water-source heat pumps, diverters retrofitted to ESMs such as solar panels and wind turbines"

Not every proposed technology was taken forward. Thermal storage will not be brought within scope at this time, and wood-fuelled boilers remain in scope despite four respondents arguing they should no longer benefit because of air quality impacts¹. Technologies such as electric vehicle charging points, home energy management systems, windows, doors and rooflights, and hybrid heat pumps were among those proposed but not included¹.

Qualifying installations have benefited from a temporary VAT zero rate in Great Britain, having previously been at the reduced rate of 5 per cent, until 31 March 2027¹. The relief was extended to Northern Ireland on 1 May 2023 following ratification of the Windsor Framework, and all of these reforms apply across the whole of the United Kingdom¹. The reforms are permanent, meaning that when the zero rate sunsets on 31 March 2027, installation of all technologies in scope will revert to the reduced rate of VAT at 5 per cent¹. Qualifying charities will be able to install all ESMs within scope VAT free until 31 March 2027, with 42 responses received on re-instating that relief, all supportive¹. A building is deemed a qualifying building if it is 95 per cent used for non-business purposes¹.

Why it matters for households

VAT relief changes the amount paid on an installation, so the scope of the relief determines which home energy measures carry a lower tax charge. From 1 February 2024, a household adding battery storage to an existing solar array, or installing it as a standalone unit connected to the grid, falls within the relief rather than outside it¹. The same applies to water-source heat pumps and to diverters that send surplus generation from solar panels or wind turbines to other uses¹. The VAT relief on energy-saving materials is one of several support routes covered in the site's grants and schemes section.

The relief is time-limited in its zero rate form. Until 31 March 2027 qualifying installations are zero rated in Great Britain, and the same treatment now applies UK-wide; after that date the charge reverts to 5 per cent¹. For a household weighing the timing of an installation, the rate that applies depends on when the work is carried out, not only on which technology is chosen.

What happens next

The reforms are intended to be implemented on 1 February 2024¹. The zero rate aspect of the relief is due to expire on 31 March 2027, at which point installations within scope revert to the reduced rate of VAT at 5 per cent¹. No further implementation dates beyond these have been reported.

Sources1 cited

1. Summary of responses - GOV.UK, gov.uk