Following the Spring Budget 2023, HMRC launched a call for evidence seeking views on whether the VAT zero rate for the installation of energy saving materials (ESMs) should be extended. The call for evidence considered the extension of the relief to additional technologies and to installations of ESMs in charitable premises.
Having reviewed the responses to the call for evidence, including a response from ICAEW, HMRC has now announced an extension to the scope of the VAT zero rate. The extension of the zero rate, as detailed below, will take effect from 1 February 2024.
Electrical battery storage
Electrical battery storage already qualifies for the VAT zero rate when installed in conjunction with a qualifying ESM.
From 1 February 2024, the zero rate will be extended to electrical battery storage that is retrofitted to a qualifying ESM. Installation of electrical battery storage as a standalone technology connected to the grid will also qualify for the zero rate of VAT.
A wide range of technologies were suggested by respondents to the call for evidence for consideration for the VAT zero rate.
The government has confirmed that the following will be included within the zero rate from 1 February 2024:
- water-source heat pumps; and
- diverters retrofitted to ESMs such as solar panels and wind turbines.
Heat pump groundworks
The intention of this VAT relief is to relieve the whole installation process of VAT. The government recognises that groundworks are integral to the installation of ground-source and water-source heat pumps. The relief will therefore be extended to some groundworks. A discrete list of named groundworks that will qualify for the zero rate will be defined in VAT legislation.
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 1 February 2024. Qualifying charities will be able to install all ESMs within scope of this relief without incurring VAT until 31 March 2027.
A relevant charitable purpose is defined as use by a charity “otherwise than in the course or furtherance of business.” This also includes use as a village hall or similar building (see section 14.7.1 of VAT Notice 708).
The VAT zero rate for ESMs is currently only temporary. It is due to expire on 31 March 2027. At this point, the installation of technologies within scope of the relief will revert to the VAT reduced rate (5%). This includes the ESMs added from 1 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 31 March 2027. However, it is possible that the zero rate will be extended before this expires.
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