Out-Law News 1 min. read
25 Jun 2012, 9:59 am
On Thursday the European Commission said that a reduced 5% VAT rate for the supply and installation of materials such as draught insulation and solar panels that is allowed for under UK law must be changed. It said the UK has two months to amend the law or face legal action in the European Court of Justice (ECJ). The ECJ has the power to fine EU member states that do not comply with EU law.
The Commission said that allowing the supply and installation of energy-saving materials at a reduced VAT rate was "beyond the scope" of the EU's VAT Directive. The Directive allows reduced VAT rates to be levied on a range of goods and services, including food, water and some drugs, but not 'energy-saving materials', it said.
"Under EU VAT rules, Member States can only apply reduced VAT rates to a limited number of goods and services, which are clearly listed in Annex III of the VAT Directive," the Commission said in a statement. "This list does not include the supply and installation of 'energy saving materials'. Therefore, the UK's application of a reduced rate in this area contravenes EU legislation."
However, a spokesperson for the Treasury told Out-Law.com that the Government "disagrees" with the Commission's findings and believes that it can legitimately enable VAT reduction for the supply and installation of energy-saving materials. The Government will "study" the Commission's reasons for its findings before determining what steps to take next, the spokesperson added.
The Government introduced a reduced VAT rate on energy-saving materials as part of its drive to reduce carbon emissions, but energy law expert Peter Feehan of Pinsent Masons, the law firm behind Out-Law.com, said that if the UK is forced to scrap the incentive it could impact on businesses.
"The European Commission’s decision is disappointing if not unexpected," he said. "Our work on the Green Deal with public and private sector clients has shown that the margins on the affordability and viability of schemes is very tight and it will be interesting to understand how this plays out in the industry and the potential impact for Green Deal providers and their supply chain partners."
Established by the Energy Act 2011, the Green Deal will allow property owners and occupiers to fund the installation of energy efficiency measures such as double glazing or insulation at no up-front costs. Those payments will be funded by 'Green Deal Providers' including finance firms. Repayments will be met through subsequent energy bills.
The Government has claimed that the scheme will lead to £14 billion worth of private sector investment over the next decade, supporting 60,000 jobs in the insulation sector alone.
