Is Retrofit Exempt From VAT?

Yes. But the system is too complicated.

You may not know it, but the zero rate VAT levy on Energy Saving Measures (ESM) is in place.

Value Added Tax or VAT is the government levy applied to much of business in the United Kingdom.

Energy-saving materials and heating equipment (VAT Notice 708/6)

How to account for VAT if you’re a contractor or subcontractor installing energy-saving materials and grant-funded heating equipment.

GOV.UKHM Revenue & Customs

With the 'normal rate set at 20% for much of what you purchase, UK citizens relish a deal when the rate is reduced.

The VAT zero setting or 'zero rate' has been used by the tax organisation HMRC for some time, and it's often implemented to stimulate an industry or provide relief when consumers are not able to afford VAT added prices.

Zero rate VAT is in place for retrofit. It's been updated in February 2024 to include more building types but is it actually working?

Background

A significant barrier to the uptake of retrofit and refurbishment projects using ESM is the cost of materials and installation.

Campaigns to remove the VAT gained pace during lockdown as more and more homeowners started looking at the comfort of their own homes.

And the cost. Of home improvements.

But today, right now, the application of the HMRC rules is proving a headache to many contractors, and the cost savings to customers are therefore not being passed on.

The Problem - Single Supply and Mixed Supply

Zero rate VAT is only applicable if the whole or majority purpose of a project, service or installation is for installation of energy saving measures.

But herein lies one of the simplest problems with the easiest of fixes.

Currently, if a builder installs a roof and adds energy saving measures, the project is not zero rate. An extension, with ESM, is not zero rate. Even removing and adding another internal wall with ESM, is not zero rate.

HMRC, who do taxes, have to take their advice from government, who also do governance, neither of these two organisations actually do building.

Every builder we spoke to in the last two weeks of canvassing opinion for this story said their was no incentive at all, to add energy saving measures either in the planning, pricing or implementation of a build.

The Solution - A Golden Egg

The new Chancellor of the Exchequer Rachel Reeves is sitting on a golden egg. Retrofit is the the gift, that will keep giving.

The Federation of Master Builder have said up to 4 million projects are being held up because of this dilemma.

There's millions of homes below EPC level C that need improving according to the ONS.

With this level of demand, one of the chocks needs to be pulled.

In the next few months between today, and the issuing of the next big budget on the Autumn.

Every single company, professional organisation and trade body with a link to government and the civil service (even HMRC) needs to lean into the idea that removing VAT wholesale on ESM is a banging idea.

Start now and don't stop until October.