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EU VAT ruling could cost construction industry

Posted: August 10, 2015

The European Court of Justice (ECJ) ruling that the UK contravened the EU VAT Directive in applying a reduced VAT rate to the supply and installation of energy-saving materials could have a significant impact on the construction industry.

The ruling affects insulation, central heating and hot water system controls, heat pumps, solar photovoltaic and solar thermal panels, and wind and water turbines. The Court ruled that these technologies could no longer enjoy a 5% rate to increase the uptake by homeowners and landlords. Instead, they must be charged at the standard 20% rate. 

The UK has a number of VAT zero-rates for goods and services, for example books, newspapers, children’s clothes and the construction of a new house. “We guard these jealously as we cannot create new ones, nor can we go back to a zero-rate if we move away from it,” says Burgess Hodgson’s VAT specialist Greg Mayne.“ One example of this was when the then Conservative Government added VAT to domestic fuel taking it from 0% to 8%, and when the Labour party came to power they could only take it back down to 5% where it still is today. ”

In the UK, the 5% reduced rate currently applies to mobility aids for the elderly, nicotine patches, sanitary protection products, domestic fuel, residential conversions (changing the number of dwellings, e.g. turning a house into flats), renovating a dwelling that has been empty for at least two years, children’s car seats, contraceptives. It also applies to the installation of energy-saving materials in residential properties. The UK was taken to the European Court of Justice for incorrectly interpreting the overarching legislation, the ‘VAT Directive’, and allowing the reduced rate of VAT to apply to the installation of energy-saving materials in all residential properties, and not – as the VAT Directive stipulated – only for social housing or as part of a social policy. “In other words,” says Greg, “it limited the use of the reduced rate work for councils and housing associations or grant-funded installations for the less well-off in society”.

The decision came out on 4 June. HMRC recently advised that there would be no revision of the VAT rate possible until the Finance Act is implemented in 2016, so this provides some ‘breathing space’ for the parties concerned to review their position and take whatever action they deem appropriate.

All other zero- and reduced-rates will remain the same for the time being, although there is an increasing level of attack by other EU Member States on the UK’s use and retention of zero-rates. Greg says there are several issues at play here, including the recent Conservative election pledge not to raise any tax rates. “This may lead to the court decision being ignored – a relatively drastic stance and not one that is to be taken lightly,” he explains. Alongside that is the opinion voiced by many EU insiders, including Miguel Arias Cañete – the Spanish Commissioner for Climate and Energy – that the outcome of the court case went against the underlying EU ethos for increasing investment (the so-called ‘Juncker Plan’), reducing climate impact and increasing energy efficiency. “It may well be that the EU is forced to review the decision on the basis that the letter of the law may not reflect the spirit and intention of the EU on a larger scale,” adds Greg.