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UK To Align Energy-Saving Tax Breaks With EU Law

by Jason Gorringe, Tax-News.com, London

10 December 2015


The UK Government has announced that it will limit the scope of the five percent reduced rate of value-added tax (VAT) on the installation of certain energy-saving materials, while retaining as much of the relief as permissible under EU law, following a judgement of the European Court of Justice.

In the Commission v. United Kingdom (C-161/14), the Court on June 4 ruled that the UK cannot apply, with respect to all housing, a reduced rate of VAT to the supply and installation of energy-saving materials, since that rate is reserved solely for transactions relating to social housing.

The UK applies a reduced rate of VAT to "energy-saving materials" that are installed in housing or that are supplied for installation in housing. The European Commission had challenged the measure, arguing that it contravenes the EU VAT Directive. According to the Commission, a reduced rate of VAT can be applied only to supplies of goods and services specified in Annex III to the Directive. That annex refers to the "provision, construction, renovation, and alteration of housing, as part of a social policy" and to the "renovation and repairing of private dwellings." The Commission considered that the supply and installation of "energy-saving materials" in the housing sector do not fall into either of those two categories.

The Commission said – and the ECJ agreed – that even if such a supply or installation were to be regarded as falling under the second category ("renovation and repairing of private dwellings"), under the actual provisions of the VAT Directive, a reduced rate of VAT cannot be applied to that category where the materials account for a significant part of the value of the service supplied. The Commission stated that the energy-saving materials covered by the UK legislation extend to materials that account for a significant part of the value of the service supplied.

In its judgment, the ECJ stated that, with regard to the first category ("provision, construction, renovation, and alteration of housing, as part of a social policy"), Annex III to the VAT Directive permits the application of a reduced rate of VAT solely to the provision, construction, renovation, and alteration of housing which relate to social housing or to services supplied as part of a social policy. It follows that the VAT Directive precludes national measures that have the effect of applying the reduced rate of VAT to the provision, construction, renovation, and alteration of any housing, irrespective of the social context in which such operations take place.

Further, the ECJ stated that, while it is true, as asserted by the UK, that a policy of housing improvement may produce social effects, the extension of the scope of the reduced rate of VAT to all residential property cannot be described as essentially social.

In response, the UK has said, for all existing customers, where the cost of the goods installed is greater than the labor cost of installing those goods, the labor will be subject to the reduced rate and the goods installed will be subject to the standard rate. The goods installed will still be subject to the reduced rate irrespective of whether their cost is greater than the labor cost if the customer is over 60 years of age, is on certain benefits (welfare), or the goods are to be installed in a building used solely for a relevant residential purpose or for relevant housing associations.

In addition, the UK is to withdraw the reduced rate for the installation of solar panels, wind turbines, and water turbines.

Currently, Group 2 of Schedule 7A to the VAT Act 1994 permits the reduced rate of VAT to apply to the installation of energy-saving materials in residential accommodation and the supply of those materials by the person installing them. Legislation will be introduced in Finance Bill 2016 to amend Items 1 and 2 and insert a new Item 3 into Group 2 of Schedule 7A of the VAT Act 1994 to deal with to whom and how the relief now applies, as explained above. In addition, Note (1)(e), (f), and (g) will be repealed (solar panels, wind turbines, and water turbines) and new notes will be inserted to determine who a qualifying person is and also to determine what is a relevant housing association.

The measure will have effect for supplies made on and after August 1, 2016.

TAGS: Finance | tax | European Commission | value added tax (VAT) | energy | law | United Kingdom | legislation | construction | services | Europe

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