The European Court of Justice has found that the UK has applied the Reduced Rate of VAT too widely in allowing the 5% rate on domestic supplies of energy saving materials. Generally the reduced rate can only be used for ‘social policies’ and using it as a general incentive for green measures is not sufficient – furthermore doubt has been raised as to the types of materials, as they do not fall into the permitted categories of ‘renovation of alteration of housing’.
We have already seen the EU force the UK to halt the 5% rate on the installation of energy saving materials to charitable premises [withdrawn as of August 2013]. That said the Government is considering its position and currently the 5% rate is still valid where eligible ESM’s are both supplied and fitted to residential properties. Any withdrawal of the saving is unlikely to be implemented until the 2016 Finance Act.