Residential solar could be facing a 15% hike in VAT rate following a European Court of Justice ruling that deemed the UK’s use of reduced VAT rates for energy-saving materials a violation of the VAT directive. Image credit: Abundance

The European Court of Justice (ECJ) has ruled that the UK’s reduction in VAT rate for energy-saving materials for housing violates the EU’s VAT Directive.
Energy Saving installs on residential accommodation in the UK currently benefit from a reduced VAT rate of 5% instead of the standard 20%.
The judgment handed down on Thursday claims that the UK “cannot apply, with respect to all housing, a reduced rate of VAT to the supply and installation of energy-saving materials, since that rate is reserved solely to transactions relating to social housing”.
A government spokesperson said: “The government is disappointed the ECJ didn’t agree that the UK had correctly implemented this relief and is now studying the decision before considering next steps.” The government has added that no one who has already pre-ordered or pre-paid for energy-saving materials at the reduced VAT rate would be affected as a result of the ruling.
The Treasury had previously argued that the lower VAT rate was legal under EU law because the Green Deal and ECO schemes were both social policies. Under EU law member states can only apply reduced VAT rates in the housing sector if it is part of a social policy.

“The question is will the UK government appeal this decision and if not, what can they do to ensure that the low carbon and renewable market doesn’t grind to an absolute halt bearing in mind that the return on investment profiles have been based on systems attracting the lower 5% VAT rate as opposed to the now proposed 20% rate.”