European Commission says low VAT rate aimed at supporting Green Deal breaks EU law

Green Deal

The European Commission is taking the UK government to court for having reduced rates of VAT to support the Green Deal.

Last June, the commission started infringement proceedings against the UK for having a 5% VAT rate on energy saving materials, such as insulation, which the Europan Commission says contravenes EU law.

It argues the products should carry the standard VAT rate of 20%.

The reduced VAT rate has been operating in the UK for years and industry leaders wrote to the government last August to tell it that quadrupling the rate would “dampen demand” for the government’s flagship Green Deal.

In the letter signed by 18 industry organisations, including the Federation of Master Builders, the UK Green Building Council, the Association for the Conservation of Energy, and the British Property Federation, they said it would “make it more difficult for energy saving measures to meet the golden rule” of the scheme. The golden rule states the savings on energy bills must exceed the cost of the measures and finance.

The government responded to the European Commission later that month saying it stood by the reduced rate.

But today, the European Commission said the reduced rate was “beyond the scope” of what was allowed and “distorted” the single market. It said that while it supported the aims of the Green Deal it did not feel reduced rates of VAT would actually be an effective boost to the scheme.

It said: “Economic studies have shown that reduced VAT rates are often not the best way to achieve policy objectives or change consumer choices.

“In the case of promoting energy efficiency, there are a number of reasons why a reduced VAT rate is not the most efficient way to deliver on this goal. For a start, it is difficult to define precisely these products, which can evolve and develop quite quickly, thereby creating uncertainty around the level of tax due.

“Moreover, a reduced rate does not target the population that needs it most, but instead is universally applied. In the case of energy efficient products, businesses are likely to represent a large proportion of those wishing to invest in them, in which case the VAT is deductible anyway. It has been shown that frequently reduced rates are not fully passed on to consumers in the form of lower prices.”

A spokesperson for HM Revenue and Customs said there had been “no material change in the UK’s view since August last year”.

She added: “We remain of the view that the reduced rate for energy saving materials within residential buildings is within the scope of what is allowed under the VAT directive.”