Following the Spring Budget 2023, HMRC began exploring how the scope of the VAT zero rate for the installation of energy-saving materials (ESM) could be extended. Later that year, they announced which technologies and installations would be added to the VAT zero rate list. These new rules came into action in February 2024, and in this article, we’ll walk you through what has changed.
ESM VAT Relief: What’s Changed?
For years, the government has attached tax incentives to investment in energy-saving and sustainable practices. Extending the VAT zero rate for ESMs is the latest move in a long line of schemes to help the UK meet its sustainability targets.
What’s Already Included?
Many of the most common ESMs were already included in the VAT exemptions before February 2024. The VAT zero rate only applies to the installation of specified ESMs in residential accommodation. So, where materials are only purchased – not installed – they will be standard-rated. The more common ESMs include:
- Controls for central heating;
- Draught stripping;
- Insulation;
- Solar panels;
- Ground and air-source heat pumps;
- Micro combined heat/power units and wood-fuelled boilers; and
- Wind and water turbines.
What’s New?
From the 1st of February, the list has been extended to include:
- Batteries
- Water-source heat pumps;
- Diverters retrofitted to existing ESMs such as solar panel or wind turbine systems; and
- Heat pump groundworks that are integral to the installation of a ground-source heat pump.
Electrical battery storage already qualified for the VAT zero rate when installed in conjunction with a qualifying ESM. However, starting in February 2024, the zero rate will be extended to electrical battery storage retrofitted to a qualifying ESM. The installation of electrical battery storage as a standalone technology connected to the grid will also qualify for a zero VAT rate.
Charities
Until August 2013, UK legislation provided a VAT relief for the installation of ESMs in a building intended for use solely for a relevant charitable purpose. This VAT relief will be reinstated from the 1st of February 2024. Qualifying charities will be able to install all ESMs within the scope of this relief without incurring VAT until the 31st of March 2027.
It can be difficult to determine what is or is not a charitable non-business activity, but village halls or similar facilities are often capable of attracting relief.
Sunset Clause
Currently, the VAT zero rate is only temporary and is due to expire on the 31st of March 2027. At this point, the installation of technologies within the scope of the relief will revert to the VAT-reduced rate (5%). This includes the ESMs added from the 1st of February 2024 and installations within charitable buildings.
Currently, the government has chosen not to make the zero rate for ESMs permanent or extend the zero rate beyond the 31st of March 2027. However, it is possible that the zero rate will be extended before this expires.
Further Support
If you’ve recently installed new ESMs or are considering installing some on your property, get in touch with our expert team of accountants at Digital Tax Matters. We’ll help you understand the relief you’re entitled to and how you can get the most value from your investment.