Cautious welcome for Chancellor’s scrapping of VAT

Chancellor Rishi Sunak’s announcement of the scrapping of VAT on energy efficiency measures has drawn a mixed reaction from industry bodies.

Delivering his Spring Statement in the House of Commons today, the chancellor Rishi Sunak announced that for the next five years, homeowners will no longer have to pay 5 per cent VAT on materials such as “solar panels, heat pumps or insulation”. It was not clear which other energy-saving measures would be eligible.

However, the statement announced that the introduction of targeted business rate exemptions for eligible plant and machinery used in on-site renewable energy generation and storage as well as 100 per cent relief for eligible low-carbon heat networks with their own rates bill, would be brought forward a year to April 2022.

Sunak announced the new tax rules as part of a series of measures to mitigate the impact of rising energy costs on UK households. He said: “As energy costs rise, we know that energy efficiency will make a big difference to bills, but if homeowners want to install energy-saving materials at the moment, only some items qualify for 5 per cent VAT relief and there are complex rules about who is eligible.”

The Heat Pump Association welcomed the cut saying it would help the electrification of heat which would lead to improved energy security and resilience. But it called on the Government to do more to boost the heat pump market, including the removal of environmental levies and further upfront support such as low-interest loans. Phil Hurley, chair of the HPA, commented: “While this decision alone will not be enough to enable all households to access technologies such as heat pumps, we are confident that it will play a role in helping to accelerate the switch to low carbon heat. But we must remember that more steps still need to be taken to support the rollout of heat pumps, including the removal of illogical environmental levies on electricity.”

However, Mike Foster, CEO of the Energy and Utilities Alliance, was dismayed that the Chancellor had done nothing to help the majority of consumers whose energy bills have rocketed. “His VAT cut on solar panels and heat pumps will be welcomed by those who make them and by those who can afford to fit them, but a VAT cut on energy bills would have helped everyone.”

“Frankly, consumers waiting to hear good news on their energy bills will be left asking, ‘is that it Chancellor?’”

With the Government about to announce an energy security strategy, some analysts were calling for this announcement to be a catalyst for greater emphasis on energy efficiency. Jonathan Maxwell, chief executive officer and founder of Sustainable Development Capital LLP, said: “A cut on VAT for energy saving measures is good news, but so much more needs to be done to promote energy efficiency. Most of the public will be shocked to learn that we waste two-thirds of the world’s energy. Policymakers must grasp the potential and very real attractions of energy efficiency, and make it a priority. After all, the cheapest and cleanest energy is the energy we don’t use.

“While we are pleased to see energy efficiency rightly receiving attention in the Government’s spring statement, it must be addressed with urgency in the upcoming energy security strategy.”