Energy Saving Materials (ESMs) and Zero rate of VAT

What are ESMs?

Energy Saving Materials improve energy efficiency of residential accommodation. As announced in the Spring Budget 2022 and from 1 April 2022 until 31 March 2027, the zero rate of VAT applies to the installation of certain specified energy-saving materials in, or in the curtilage of, residential accommodation in Great Britain. Then from May 2023, the zero rate also applied to Northern Ireland.

HMRC’s consultation on extension of the zero rate VAT for ESM’S

In the Spring Budget 2023, HMRC commenced a consultation on whether the zero rate should be extended further and HMRC have since published details of additional energy saving materials that will apply from 01st February 2024.

Notice 708/6 Energy Saving Materials (section 2.7) details what is covered by the zero rate and further details from section 2.11 onwards.

The zero rate is driven by the installation of energy saving materials, so where only materials are purchased, they will be standard rated, a home DIY’er will therefore not benefit on purchasing materials but can see zero rating on costs associated with contractors installing the goods.

What qualifies as Energy Saving Materials?

The more common energy saving materials includes controls for central heating, draught stripping, insulation, solar panels, ground and air source heat pumps, micro combined heat/power units and wood fueled boilers, wind and water turbines.

Prior to February 2024 update, the installation of battery storage could be zero rated but only as part of an overall installation of a solar power system, simply adding battery storage to an existing installation was not.  But from 01 February 2024, the zero rate is extended to electrical battery storage that is retrofitted to a qualifying ESM. Also, installation of electrical battery storage as a standalone technology connected to the grid will also qualify for the zero rate of VAT.

Other additions to the list of energy saving materials will include water-source heat pumps and diverters retrofitted to existing energy saving materials such as solar panel or wind turbine systems and bringing up the rear, heat pump groundworks (although not covering all groundworks, it will permit those works that are integral to the installation of a ground source heat pump).

Energy Saving Materials and Charities

Historically, charities could benefit from the zero rating where the energy saving materials were installed on a building intended for use solely for a relevant charitable purpose.  This was withdrawn in 2013 due to EU legislation.

The zero rating relief will be reinstated from 01 February 2024 which will allow qualifying charities to install energy saving materials, same as for domestic consumers.  A charity qualifies for the zero rating where the property the installations takes place is used otherwise than in the course or furtherance of business. 

In other words, charitable non-business activity triggers the zero rating.  What is or isn’t charitable non-business can be a contentious matter itself, but village halls or similar are often capable of achieving the relief.

Installation of ESMs and Zero Rate VAT

As before, the installation of energy saving materials may require ancillary works/supplies and where applicable, can be zero rated too.  The HMRC example is in order to install loft insulation, it may be required to enlarge the loft hatch in order to get materials and labourers into the roof space, such enlarging works would therefore quality for zero rating when done as part of an overall project of loft insulation.

Another example may be when installing air source heat pumps, which may require new pipework and radiators and if done as one project, the whole can be zero rated, whereas if the customer was just replacing radiators first, without the installation of the heat pump, then the installation of radiators is not eligible, even if the radiators are heat pump compliant.

Summary

There is plenty of evidence that zero rates/cuts in VAT rate do not automatically translate into savings for the consumer, it may be more likely that suppliers may use VAT savings as a marketing technique but not always pass on the full saving to the consumer. 

This zero rating is temporary, expiring 31 March 2027 but could be subject to extension or withdrawal depending upon government strategy and notwithstanding a potential change of government. 

Get in touch

For further information on which ESMs qualify for zero rate vat, or any VAT issues or queries please contact our VAT experts who will be happy to assist you.