The European Commission has confirmed it will take the UK to court in an attempt to force the Treasury to impose the full rate of VAT on energy-saving goods, warning that tax breaks will not help deliver the aims of the government’s flagship Green Deal energy efficiency scheme.
The commission issued a statement confirming it will refer the UK to the EU Court of Justice over the practice of imposing reduced VAT rates on green goods.
The UK Treasury charges a lower five per cent rate of VAT on some energy-saving materials instead of the standard 20 per cent, in a move designed to reduce the upfront costs of installing energy-efficient products.
But the commission ordered the UK to scrap the lower rate last year on the grounds that it failed to comply with the EU’s VAT Directive. Annex III of the legislation says reduced rates can be applied for the provision, construction, renovation and alteration of housing as part of a social policy, but not for energy-saving materials.
A spokeswoman for the Treasury said its position remained the same as in August last year, when it confirmed it would defend the reduced VAT for energy saving materials, but withdraw the reduced rate from 2013 for buildings used only for charitable purposes.
‘We remain of the view that the reduced rate for ESMs within residential buildings is within the scope of what is allowed under the VAT Directive,’ she said.
The EC writes:
… The European Commission has decided to refer the United Kingdom to the EU Court of Justice for its reduced VAT rate on the supply and installation of energy-saving materials. This measure goes beyond what is allowed under the VAT Directive.
Under EU VAT rules, Member States may apply reduced VAT rates to the supply of goods and services used in the housing sector, so long this is part of a social policy. Energy saving materials could be covered by this provision if the conditions are met i.e. if they are used for social policy purposes in the construction, renovation and alteration of housing.
However, there is no provision in the VAT Directive to allow a reduced VAT rate on ‘energy saving materials’ specifically, and the universal application of a reduced rate for energy saving materials is therefore not allowed. By allowing a reduced VAT rate to all energy saving materials, the UK is therefore going beyond the scope of what is permitted under EU law.
Member States themselves unanimously decided on the list of goods and services that could benefit from a reduced VAT rate, and they also insisted that this list be strictly applied, with no room for manoeuvre or interpretation. This is important to prevent competitive distortions in the Single Market and to ensure a fair and level playing field between all Member States.
The Commission is aware that the reduced VAT rate for energy saving materials has been linked to the UK’s ‘Green Deal’ to improve the energy efficiency of buildings. While it supports the objectives of the UK Green Deal (see IP/13/89), the Commission does not believe that breaking EU VAT rules will help in achieving these objectives.
Economic studies have shown that reduced VAT rates are often not the best way to achieve policy objectives or change consumer choices. In the case of promoting energy efficiency, there are a number of reasons why a reduced VAT rate is not the most efficient way deliver on this goal. For a start, it is difficult to define precisely these products, which can evolve and develop quite quickly, thereby creating uncertainty around the level of tax due. Moreover, a reduced rate does not target the population that needs it most, but instead is universally applied. In the case of energy efficient products, businesses are likely to represent a large proportion of those wishing to invest in them, in which case the VAT is deductible anyway. It is has been shown that frequently reduced rates are not fully passed on to consumers in the form of lower prices.
There are other, more efficient, ways of promoting energy efficient materials while remaining in line with EU law e.g. through direct subsidies.
The referral to the EU Court of Justice is the last step in the infringement procedure.
Background
The European Commission sent a reasoned opinion to the United Kingdom on 21 June 2012 but since the reply received in August 2012 was not satisfactory, the European Commission has decided to refer the case to the Court of Justice.
For press releases on infringement cases in the taxation or customs field see: LINK
For the latest general information on infringement measures against Member States see: LINK
On the February infringement package decisions: MEMO/13/122 see: LINK
On the general infringement procedure: MEMO/12/12 see: LINK and LINK
See the Commission’s statement at: LINK and Business Green News: LINK
