Reduced rate VAT on renewables questioned

The attractive 5% VAT rate on domestic renewable energy heating installations could be under threat thanks to the pronouncement from The European Court of Justice that this reduced rate VAT is illegal.

There's an ill wind blowing in from Europe this week with a judgment that could have an adverse effect on the pockets of UK consumers and hurt companies like Yorkshire Heat Pumps who promote uptake of renewable technolgies.

The European Commission first ordered the UK to drop this tax break in 2013, because, it says, the policy does not comply with the EU's VAT Directive. The basis of the UK Treasury's appeal later that year was that upgrading homes not only saves emissions and boosts energy efficiency, but also has wider social benefits that justify the reductions.

However, on Thursday this week the European Court of Justice (ECJ) ruled the reduced VAT rate could only apply to transactions related to social housing. What's more, the UK will face weekly fines unless it changes the rules.

What makes this doubly bonkers is the fact that the UK has legally binding carbon reduction targets to hit and will face heavy penalties if they are missed. This latest ruling could make that all the more likely.

Government has introduced a range of measures to help us to hit these carbon targets, including the introduction of the domestic Renewable Heat Incentive scheme and the tax break of reduced rate VAT on the equipment from the standard 20% to 5%. Now the European Court of Justice has ruled this reduced rate VAT illegal for domestic installations it looks increasingly likely there will have to be a VAT rise. Industry experts say there is no need to panic and the change won't be immediate as it will require legislation so probably in next year's Finance Bill.

Whatever the timing, one thing is very likely -  this ruling will make these technologies more expensive for homeowners and no doubt suppress uptake.  

That hurts customers' pockets, damages small businesses like ours and makes it all the more likely we will miss the carbon target and have to pay the massive fine. I'd imagine there are lots of experts in government poring over the ruling to see what other options there might be. Watch this space.

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