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.
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.
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:
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.
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:
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:
VAT Liability Team
Room 3/34, 3rd Floor
100 Parliament Street