EC requests UK drops reduced VAT on energy saving materials

The European Commission has asked the UK to amend its legislation which allows a reduced 5% VAT rate for the supply and installation of "energy-saving materials" or face legal action.

The Commission said that the UK reduced VAT rate goes “beyond the scope” allowed under the VAT Directive (Council Directive 2006/112/EC), and has given the UK just two months to amend the law or face legal action in the European Court of Justice (ECJ). 



The ECJ has the power to fine EU member states that do not comply with EU law. Under the European law Member States can only apply reduced VAT rates to a limited number of goods and services. The Directive allows reduced VAT rates to be levied on a range of goods and services, including food, water and some drugs, but not “energy-saving materials.” 

The request from the European Commission takes the form of a Reasoned Opinion (the second stage of an infringement procedure).

Speaking about the announcement David Frise, head of sustainability at B&ES said: “This is really disappointing. VAT is a tax on consumption; so it just seems bizarre to increase the rate of tax on measures designed to reduce consumption of energy.



“I can understand that the European Commission would want to bring everyone into line, but this is the wrong line,” he added. “Wouldn’t it be better to allow all member states to do the same thing and encourage people to invest in energy saving measures rather than enforce a rate of tax that discourages? VAT is a regressive tax that disproportionately penalises the poor so the UK government should hold fast if it can."

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A spokesperson for the Treasury told Out-Law.com that the Government "disagrees" with the Commission's findings and believes that it can legitimately enable VAT reduction for the supply and installation of energy-saving materials.

The Government introduced a reduced VAT rate on energy-saving materials as part of its drive to reduce carbon emissions. The Government will "study" the Commission's reasons for its findings before determining what steps to take next, the spokesperson added.