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Do your clients know about energy efficiency VAT perks?

17 February 2020

Over the years, voices within construction bodies have called on successive governments to reduce the rate of VAT for domestic refurbishment, or even zero-rate it. This would, it is argued, provide a boost to the construction industry by making home improvements cheaper, and potentially also incentivise sustainable retrofits.

There are already several exceptions to the standard 20% VAT rate, which architects, contractors and their clients may be unaware of. Special categories of refurbishment include, for example, the conversions of non-dwellings into dwellings (5% VAT or 0% VAT for housing associations) and renovation of homes that have lain empty for at least two years (5% VAT).

Since July 1998, the VAT on installation of energy-saving materials and equipment has also been 5% rated. But in October 2019 this reduced VAT rate was made subject to certain conditions. The rate is applicable for housing associations and for people over 60 or receiving benefits. All other refurbishment projects using energy-saving materials are subject to the ‘60% test’.

This states that if the cost of qualifying materials is less than 60% of the total cost of the project, then the reduced rate of 5% can apply to the total cost of installing energy-saving measures (materials plus installation).

Where qualifying materials exceed 60% of the total cost, the reduced rate can only apply to labour/installation costs; the standard VAT rate must be applied to the cost of materials.

VAT Notice 708/6 sets out these regulations in detail. Interestingly, it indicates that the 60% threshold is expected to affect mainly combined installations of solar panels and batteries, which appears to be the target. The materials and equipment that qualify include:

  • controls for central heating and hot water systems
  • draught stripping
  • insulation
  • solar panels
  • ground source heat pumps
  • air source heat pumps
  • micro combined heat and power units
  • wood-fuelled boilers

Notable by their absence are energy-efficient windows and MVHR (mechanical ventilation with heat recovery), a Passivhaus staple. The October 2019 revision also removed wind turbines and water turbines from the previous list.

Architects can explain these VAT incentives to domestic clients when costing various energy-saving options, and suggest bringing them up with a contractor, or whoever is responsible for supplying materials and equipment for a project.

The ‘60% rule’ is hard to follow but worth the effort: it could save your clients money and provide a green incentive

Architect Robert Prewett is a specialist in deep energy retrofits. He believes that a VAT change on refurbishments could directly generate ambitious energy-saving work. Domestic refurbishment projects could be made VAT-free, he argues, on condition that the project includes a deep energy retrofit of the whole house.

“If a house extension project had a cost of £150k to £200k, the 20% VAT saving could be around the same cost as a deep energy retrofit,” Prewett points out. “In some cases, a homeowner could be getting the energy-saving upgrade for free.”

Reducing VAT on refurbishments would not be enough on its own to promote more sustainable behaviour on the scale necessary to meet the UK’s 2030 and 2050 carbon targets. However, deep energy retrofits have been so few in number to date that such a move, Prewett argues, would be relatively painless for the Treasury in terms of lost revenue, yet could kick-start serious energy retrofits at scale.

The scale of the retrofit challenge was recently made clear by a recent report by the Institution of Engineering and Technology and Nottingham Trent University. Scaling Up Retrofit 2050 concluded that some 26m deep retrofits will be needed in the UK between now and 2050, at a rate of around 1.5 homes every minute, if the government is to meet its carbon targets.

A petition asking parliament to debate a VAT measure similar to Prewett's suggestion was set up by Arboreal Architecture’s Harry Paticas in 2019. It called for 0% VAT on "deep retrofit/eco-refurbishment building works" on all homes, suggesting that the current 5% rate of VAT on energy saving measures is not straightforward to claim and does not cover all retrofit elements.

While there are are no hard-and-fast statistics available to confirm the effects that a lowering of VAT for energy-saving refurbishments would have, Cut The VAT has published findings it commissioned from Experian into lowering VAT on renovations in general: An estimate of the effects of a reduction in the rate of VAT on housing renovation.

“There are many architects that find it difficult to persuade clients to spend more on insulation and other energy-saving measures, and less on glass,” Prewett suggests. “Many small practices would love to be able to do deep energy retrofits for clients, and a larger VAT incentive would provide a great opportunity for them.”

Thanks to Robert Prewett, Director, Prewett Bizley Architects.

Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas

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