Households must pay higher VAT on insulation and solar panels, EU rules

ECJ ruling could force George Osborne to break his own manifesto pledge not to raise VAT

Green Deal asssessors will suggest energy–saving measures to consumers.
The ruling could add hundreds of pounds to the cost of installing rooftop solar panels. Credit: Photo: Simon Burt/PA

Millions of households across Britain face paying more for solar panels and home insulation after an EU ruling that could force George Osborne to break his manifesto pledge by raising VAT.

The court said that the reduced VAT rate should only apply to social housing - raising the prospect that the VAT rate for all other homeowners would be increased to the usual 20 per cent.

This would add hundreds of pounds to the cost of installing home insulation measures and rooftop solar panels - despite the fact the EU has imposed renewable energy targets on the UK and wants the UK to improve its energy efficiency.

Experts said the ruling presents a "direct challenge" to the Chancellor's so-called "triple lock" commitment in the Queen's Speech, which rules out increases in income tax, VAT and national insurance.

Ashley Fox, leader of the UK Conservatives in the European Parliament, said the ruling “defies common sense”. He told Euractiv: "People will be aghast when they see the EU on the one hand hectoring member states about carbon reduction while on the other handing down judgments like this."

Loft insulation, British Gas

The ruling could increase the cost of home insulation

David Weatherall, policy expert at the Energy Saving Trust, said: “This a huge backwards step and we have fully supported the UK’s fight to maintain a low rate of VAT on energy saving products.”

“Cold homes is no niche issue. It is a widespread problem. Our research shows that nearly 40 per cent of households are not warm enough in winter.

“At the same time the UK is going through a solar revolution with millions of homeowners taking advantage of green energy but an increase in VAT could bring our progress in this area to a grinding halt.”

A Government spokesman said: “The Government will study the judgement carefully and consider next steps.”

Any change as a result of the ruling would not be retrospective and would not affect anyone who had already pre-ordered or pre-paid for their energy-saving product.

Roger Helmer, Ukip's energy spokesman, said the ECJ ruling was "simply ridiculous beyond belief".

"While the EU claims it wants to reduce energy consumption, this judgement shows what the EU ‘really really wants’ is to increase its take from the VAT system from which it takes a portion of every transaction," he said.

However Dave Sowden of the Sustainable Energy Association, which represents companies that install and manufacture energy-saving products, said he believed HMRC could preserve most of the reduced rates if it simply justified them on different grounds.

The current reduced rate that has been ruled illegal had been justified by the UK government as fulfilling a social policy objective. HMRC could instead apply to offer the reduced rate through an exemption allowed for home renovation or refurbishment, he said.

George Bull, senior tax partner at Baker Tilly, told Economia: “This judgment is a further example of the EU’s willingness to curtail the UK’s legislative freedom, and it presents a direct challenge to the ‘triple lock’ commitments given in the Queen’s Speech."

A Government spokesperson said: “The government has committed to a tax lock that will rule out rises in income tax, NICs and VAT during this Parliament and we will deliver it.”