Winter is coming and so is the taxman

The Government confirms increases in VAT on the installation of energy saving products adding costs for residents and landlords 

With winter just around the corner anyone thinking of installing energy saving devices such as draught excluders, insulation materials, energy efficient central heating or hot water control systems should do so now as VAT on the installation of these products is set to rise sharply, warn London Chartered Accountants Blick Rothenberg LLP. 

The government has confirmed that the current reduced 5% rate of VAT would rise to 20% due to EU legislation, which states that the reduced rate should only apply to installations in social housing and not in residential property in general. 

Alan Pearce, VAT Partner at Blick Rothenberg, stated: “This is the EU dictating the tax policy of the UK Government and although HMRC has issued a policy paper stating that any changes would not be introduced until the Finance Act 2016, this is almost certain to result in a significant rise in the cost of installations. Therefore, anyone thinking about installing any of the above products should do so sooner rather than later.” 

The 5% reduced rate of VAT is currently charged on the installation of energy saving products when incorporated into any residential buildings. This relief includes the installation of: 

• Insulation materials for walls floors, ceilings, roofs, water tanks and pipes 

• Draught excluders for doors and windows
• Certain central heating and hot water control systems • Solar panels
• Wind and water turbines
• Ground and air source heat pumps 

However, the EU Court recently ruled that the 5% reduced rate has been implemented widely by the UK Government. The relief should be restricted to installations which are “part of a social policy such as social housing projects and should not apply to everyone or housing generally or where the installation is part of a property renovation or alteration that qualifies for the reduced rate of VAT in its own right”. 

The VAT changes closely follow the ending of the Landlords Energy Saving Allowance (LESA) in April 2015, which was not renewed by the Government despite having plenty of opportunities in two budgets this year to do so. 

The LESA had been available since 2004 and allowed landlords to incur expenditure on improving the energy efficiency of their let residential properties. The allowance gave a maximum deduction of £1,500 against rental profit per dwelling to cover the costs of items such as loft and wall insulation as well as draught proofing. These costs would not usually have been deductible against rental income. 

Robert Pullen, Personal Tax Manager at Blick Rothenberg, commented: "The failure to renew the LESA for landlords will be seen by many as short-sighted. Instead of encouraging energy efficient improvements, landlords will now have to consider whether to go ahead on the basis they have to wait until they eventually sell the property to get any tax relief at all."