To drive down emissions in one of its most polluting sectors, the UK applies a reduced rate of 5% on energy saving products such as insulation, solar panels, wind turbines, hot water and central heating systems for residential properties.
The Commission, however, points out that these products are not included among the 18 goods and services listed in Annex III of the EU VAT Directive for which a reduced rate can be applied.
Arguing that the UK is in breach of EU law, the Commission issued the UK with a reasoned opinion in June requesting it apply the standard VAT rate of 20%.
While the UK caved into the Commission’s demands to withdraw of the reduced rate of VAT for energy saving materials installed in buildings used for charitable purposes, it has decided to fight to keep the reduced rate for energy saving and heating products in homes. The case is now likely to be decided at the European Court of Justice (ECJ).
The case will depend on whether or not the UK can convince the ECJ that its reduced rate counts as having a social purpose, since item 10 of Annex III of the VAT Directive permits reduced rates for the “provision, construction, renovation and alteration of housing, as part of a social policy”.
“HMRC are trying to shoehorn it into other categories that are permitted a reduced rate,” said Mark Agnew of Baker & McKenzie. “It seems the Commission disagree with this as they see it as environmental rather than social policy.”
Jacqueline Cottrell of Green Budget Europe sees environmental and social policies as closely linked.
“The UK already has lots of social policies on environmental pricing,” said Cottrell. “These precedents might help.”
Cottrell is pleased the UK is attempting to fight the Commission as she believes the removal of the reduced rate would be a step back for environmental policy.
“Reduced VAT rates are a powerful tool to help get energy saving products into the market,” said Cottrell. “It’s disappointing that more is not being done on greening the VAT system.
More simplification
The Commission’s move is part of a wider drive to simplify the EU’s VAT system by reducing exemptions and harmonising the VAT treatment of goods and services across the single market.
Infringement proceedings are relatively common. Agnew points out that the UK generally tries to follow the Commission’s line, so that it is challenging shows it believes it has a case to fight.
“Contrast this to a couple of years ago when the Commission challenged the UK's zero-rating on aircraft which the UK accepted and subsequently amended UK VAT law,” said Agnew.
If the UK is able to successfully prove that its VAT incentive for energy saving products can fit under the social exemption, it may redefine what constitutes a social policy and open the door for other countries to bring in similar incentives.
