Spring Statement – The route to net zero or an unworkable incentive?

2 August 2022

As of Friday 1st April 2022, the government introduced a time-limited zero-rate of VAT for the installation of energy saving materials (ESMs) for residential accommodation.

The zero-rate is anticipated to be available until 31 March 2027 and will then revert to the previous 5% reduced rate of VAT.

What are ESMs?

Currently, some of the energy saving materials included are items such as solar panels, insulation, wind and water turbines, wood-fuelled boilers and air source heat pumps.[1] The current rules are a welcome update to the complexity introduced in 2019 and are more advantageous than both the 2019 rules and the preceding position. The 2019 rules required the UK to exclude wind and water turbines from the list of ESMs for example.

Following withdrawal from the European Union the government has permanently reversed the 2019 rules along with introducing the 5-year zero rate to the installation of ESMs in residential properties. According to the government’s policy paper[2], “the measure is intended to incentivise the take-up of ESMs in Great Britain… in line with the government’s net zero objectives”.

Impact

There is a clear need for energy saving materials in the UK as a result of inflation, rising energy costs and climate change. According to the UK government’s 2020 report only 3.3% of homes (roughly 970,000) in the UK are generating electricity through solar panels. This is equivalent to 4.1% of total energy consumption.

Wind turbines make up a quarter of the UK’s electricity with over 11,000 on and offshore and according to government data, two-thirds of homes (or 19 million) need better insulation[3]. It is possible to install home wind turbines, though this would be subject to planning, would require a large amount of space to abate any potential nuisance and costs around £33,000.[4]

When considering the installation of ESMs many will consider the large upfront cost with no overall financial gain for between 9 and 17 years. In this situation many consumers will consider such an expense untenable. According to Greenmatch[5], one of the most common domestic solar panel sizes is a 4kW solar system, which costs around £6,000 and over 25 years would generate around £9,240 in savings.

Overall, how much you can save will depend on levels of electricity consumption, how efficient the solar panel is and if you generate an income from other funding schemes. Inflation alone may wipe out any cost saving to consumers, with a projected 7-8% overall rise in material prices and with increases for certain materials expected to more than double during the course of the next year[6].

On the other hand, with inflation reaching record levels in recent memory[7], coupled with energy security concerns and fears over climate change, individuals may seek further control over their energy usage and choose to divert their energy consumption away from large energy companies.

As pressure on personal finances grows and with the cost of borrowing set to continue climbing it may be that sellers are forced to look for additional incentives such as installing solar panels in order to entice buyers and this may be a window of opportunity for homeowners to stand out in the market.

Additional proposals have since been suggested in a letter[8] signed by members of the Sustainable Homes and Buildings Coalition to help decarbonise homes including:

  • information campaigns
  • improving energy efficiency delivery in social housing
  • mandating targets for delivery by local authorities; and
  • adjusting stamp duty based on the energy efficiency of a home.

The adjustment of stamp duty land tax would provide a rebate to households who improved their energy efficiency within two years of buying, however, this would involve a double outlay for purchasers who may already be struggling to make ends meet.

In this situation, the government would be encouraging buyers to invest money that otherwise would have been spent on stamp duty land tax into their homes, reducing reliance on the existing energy grid and improving overall housing stock.

Summary

It is clear that a multi-pronged approach is necessary in order to incentivise home improvements. Combating inflation, fears over energy scarcity and climate change are unlikely to be solved by the reduction in VAT and may have arrived too late to make any difference to the cost of ESMs. 

 

[1] Energy-saving materials and heating equipment (VAT Notice 708/6) - https://www.gov.uk/guidance/vat-on-energy-saving-materials-and-heating-equipment-notice-7086

[2] The Value Added Tax (Installation of Energy-Saving Materials) Order 2022 – published 23 March 2022 -https://www.gov.uk/government/publications/changes-to-the-vat-treatment-of-the-installation-of-energy-saving-materials-in-in-great-britain/the-value-added-tax-installation-of-energy-saving-materials-order-2022

[8] https://www.housing.org.uk/news-and-blogs/news/joint-letter-secretary-of-state-beis-kwasi-kwarteng-decarbonisation-homes/

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