Revenue & Customs Brief 26/12

VAT - withdrawal of the reduced rate of VAT for energy saving materials installed in buildings used for a relevant charitable purpose - infringement proceedings by the European Commission

Purpose of this Brief

At Budget 2012, the Government announced its intention to withdraw the reduced rate for energy saving materials (ESM) installed in buildings used solely for a relevant charitable purpose. The Government is taking this action following pre-infraction communication with the European Commission (EC) who pointed out that this reduced rate is not permitted under European law. This Brief seeks views on two questions arising from the Budget 2012 announcement.

On 21 June 2012, the EC published a Reasoned Opinion which is the first public step in the process of taking infringement action against the UK in respect of its reduced rate for ESM (whether installed in residential accommodation or in buildings intended for use solely for a relevant charitable purpose). This Brief explains that the Government's view is that the reduced rate for the installation of ESM in residential accommodation is consistent with the VAT Directive and it will be defending this.

Who needs to read this?

Businesses in the construction sector who install ESM, charities that use buildings solely for a non-business use and anyone who manages a village hall or similar establishment.

Background

The UK applies a reduced rate of VAT to the installation of ESM in various types of building. However, the EC has initiated legal proceedings against the UK on the basis that this reduced rate is not allowed in EU law and the UK is therefore in breach of its obligations as a Member State of the European Union.

The EC has commenced these proceedings on three grounds:

  • that there is no specific provision in EU law to allow a reduced rate for ESM
  • that the EU provisions on which the UK relies as the legal basis for the reduced rate (Category (10) of Annex III to the Principal VAT Directive) only apply where introduced 'as part of a social policy', whereas the UK's relief for ESM has been introduced as part of an environmental policy, and
  • that, in any event, the UK's relief is too wide as the EU provisions on which it relies apply only to housing, which does not include buildings used for a relevant charitable purpose

While the Government does not agree with the arguments in relation to the first two bullet points above, it has reluctantly accepted that the argument in the third bullet point is correct. Consequently, at Budget 2012, the Government announced its intention to withdraw this reduced rate from charitable buildings as part of Finance Bill 2013 and informed the EC of this.

The subsequent publication of the EC's Reasoned Opinion indicates that it intends to proceed with the infraction against the UK in any event. The Government will continue to defend the remainder of the reduced rate.

Questions

The Government intends to introduce legislation in Finance Bill 2013 to withdraw the reduced rate for ESM installed in buildings used for a relevant charitable purpose with the legislation to come into effect on the first day of the month following Royal Assent (likely to be 1 August 2013). However, HMRC seeks the views of those affected on the following questions:

  1. Does the proposed date (1 August 2013) for the removal of the reduced rate for the installation of ESM in relevant charitable buildings present any particular problems? If so, can you explain what they are and what alternatives you propose?
  2. Are there any particular factors that HMRC should take into account when making this change?

Transitional Rules

Given that nearly a year's prior notice of the withdrawal of this relief has been given, the Government does not intend to provide for any additional transitional rules (subject to comments received on the questions above). However, where work has commenced for the installation of ESM before the date of withdrawal (provisionally 1 August 2013), the reduced rate will continue to apply to the whole installation even if part of that installation is performed after that date.

Responses should be sent by 20 October 2012 by email to Sandy Mackie or by post to:

Sandy Mackie
HMRC
VAT Liability Team
Room 3/34, 3rd Floor
100 Parliament Street
London
SW1A 2BQ

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