Energy-Saving Materials

The supply and fitting of energy-saving materials in residential accommodation attracts the zero rate of VAT. What does it apply to? What are the qualifying conditions? What case law is there on this topic?

A guide for subscribers.

At a glance

The goods and services that this guide applies to are:

Group 23 of Schedule 8 VATA 1994

Group 23 covers Energy-Saving Materials (ESMs). These were previously in Group 2 of Schedule 7A VATA 1994.
- These items are currently zero-rated for installations in Great Britain (GB):
  - This applies for a limited time: 1 April 2022 to 31 March 2027. After this point, the rate will return to the reduced rate of 5%.
  - From 1 April 2022, the eligibility criteria required for supplies of ESMs and installation services were removed. The social policy conditions and 60% test were abolished.
  - The ESM list was expanded to include wind and water turbines from 1 April 2022.
  - There were further extensions to the relief from 1 February 2024. See What's new?, below.
- For installations in Northern Ireland, the previous rules continued to apply until 30 April 2023. From 1 May 2023 to 31 March 2027, the temporary zero-rating for ESMs was extended to cover Northern Ireland, the previous eligibility criteria were removed and wind and water turbines were added.
  - As with GB, there were further extensions to the relief from 1 February 2024. See What's new?, below.

Group 3 of Schedule 7A VATA 1994:

Group 3 covers the grant-funded installation of heating equipment or security goods or connection of gas supply.
- These items are subject to the reduced rate of 5%.

This note works through the VAT legislation and adds observations and case law.

It is important to consider whether other goods and services are being provided at the same time as the installation of ESMs as, if they are, it is necessary to determine whether they constitute a single supply subject to one VAT rate, or multiple supplies which may be subject to different rates of VAT.

For example:

A trader is contracted to build a domestic extension. As part of the same contract, they are required to fit thermostatic valves to all the radiators in the house. This is a single standard-rated supply of construction services.
Contrast this to a trader who has a contract to build an extension (standard rated) and sometime after the work has commenced, the homeowner separately asks them to install thermostatic valves. This supply of thermostatic valves is a single supply that qualifies for ESM relief.

See Mixed supplies: Single or Multiple supply?

What's new?

Autumn Statement 2023

From 1 February 2024, ESMs VAT relief was extended to include:

The installation of ESMs in buildings used solely for a Relevant charitable purpose, such as village halls or similar recreational facilities for a local community.
Electrical battery storage (either retrofitted to a qualifying ESM or installed as a standalone technology connected to the National Grid).
Water-source heat pumps.
Smart diverters retrofitted to ESMs such as solar panels and wind turbines that enable excess electricity to be used within a building in which it is generated rather than exported to the National Grid.
Groundworks, or dredging a body of water, to install pipework or other equipment necessary for the operation of a ground or water source heat pump.

These items qualify for the temporary zero rates until 31 March 2027 after which they will be reduced-rated.

Energy-saving materials

The following supplies, found in Group 23 Sch 8 VATA 1994, are zero-rated supplies relating to energy-saving goods.

These zero-rating rules apply:

From 1 April 2022 until 31 March 2027 in Great Britain.
From 1 May 2023 until 31 March 2027 in Northern Ireland.

Before those dates, supplies largely qualified for the reduced rate of VAT (5%). The exception to this is where the scope of ESM relief has been expanded; such items previously being standard rated.

Notable recent changes in the scope of relief include:

Wind and water turbines were added as ESMs from 1 April 2022.
From 1 February 2024, ESMs relief was extended to include:
- The installation of ESMs in buildings used solely for a relevant charitable purpose, such as village halls or similar recreational facilities for a local community.
- Electrical battery storage (either retrofitted to a qualifying ESM or installed as a standalone technology connected to the National Grid).
- Water-source heat pumps.
- Smart diverters retrofitted to ESMs such as solar panels and wind turbines that enable excess electricity to be used within a building in which it is generated rather than exported to the National Grid.
- Groundworks, or dredging a body of water, to install pipework or other equipment necessary for the operation of a ground or water source heat pump.

See the Previous ESM legislation tab.

Unless the government extends the zero rating, from 1 April 2027, ESMs will revert to the reduced rate of 5%.

Note: the legislation below is as it stands for supplies on or after 1 February 2024, after the extensions to the relief described above.

Group 23

1. Relevant supplies of services of installing energy-saving materials in:

(a) residential accommodation, or

(b) a building intended for use solely for a relevant charitable purpose.

Installing energy-saving materials includes carrying out groundworks, or dredging a body of water, in order to install pipework or other equipment necessary for the operation of a ground source heat pump (h below) or a water source heat pump (ia below).

2. Relevant supplies of energy-saving materials by a person who installs those materials in:

(a) residential accommodation, or

(b) a building intended for use solely for a relevant charitable purpose.

A building is used for a relevant charitable purpose if it is used by a charity:

(a) otherwise than in the course or furtherance of a business, or

(b) as a village hall or similarly in providing social or recreational facilities for a local community.

Meaning of 'energy-saving materials'

(a) Insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings.

(b) Draught stripping for windows and doors.

(d) Hot water system controls.

(e) Solar panels.

(f) Wind turbines.

(g) Water turbines.

(h) Ground source heat pumps.

(i) Air source heat pumps.

(ia) Water source heat pumps.

(j) Micro combined heat and power units.

(k) Boilers designed to be fuelled solely by wood, straw or similar vegetal matter.

(l) Electrical storage batteries (within the description below).

(m) Smart diverters (devices capable of automatically diverting electricity generated by a microgeneration system** to one or more appliances, in particular circumstances).

Electrical storage batteries

An electrical storage battery is within the scope of (l) above if it is intended for use solely for storing energy converted from electricity that was:

(a) supplied* to the residential accommodation or building in question, or

(b) generated by a microgeneration** system.

*construed in accordance with section 64(1) of the Electricity Act 1989.

**A microgeneration system means equipment that generates electricity, and that is itself an energy-saving material for the purposes of Group 23.

Meaning of 'residential accommodation'

For the purposes of Group 23 'residential accommodation' means:

(a) a building, or part of a building, that consists of a dwelling or a number of dwellings.

(b) a building, or part of a building, used for a relevant residential purpose.

(d) a houseboat.

(2) For the purposes of this Group 'use for a relevant residential purpose' has the same meaning as it has for the purposes of Group 1 (see paragraph 7(1) of the Notes to that Group).

(3) In sub-paragraph (1)(d) 'houseboat' has the meaning given by paragraph 7(3) of the Notes to Group 1.

Meaning of 'relevant supplies'

For the purposes of Group 23 'relevant supplies means supplies made:

(a) where the residential accommodation is in England, Wales or Scotland, on or after 1 April 2022 and before 1 April 2027.

(b) where the residential accommodation is in Northern Ireland, on or after 1 May 2023 and before 1 April 2027

Grant-funded installation of goods & supplies

Group 3 Schedule 7A VATA 1994 applies to the grant-funded installation of heating equipment or security goods or connection of gas supply.

Reduced rate VAT applies to the following Group 3 supplies:

1. Supplies to a qualifying person of any services of installing heating appliances in the qualifying person’s sole or main residence.

2. Supplies of heating appliances made to a qualifying person by a person who installs those appliances in the qualifying person’s sole or main residence.

3. Supplies to a qualifying person of services of connecting, or reconnecting, a mains gas supply to the qualifying person’s sole or main residence.

4. Supplies of goods made to a qualifying person by a person connecting, or reconnecting, a mains gas supply to the qualifying person’s sole or main residence, being goods whose installation is necessary for the connection, or reconnection, of the mains gas supply.

5. Supplies to a qualifying person of services of installing, maintaining or repairing a central heating system in the qualifying person’s sole or main residence.

6. Supplies of goods made to a qualifying person by a person installing, maintaining or repairing a central heating system in the qualifying person’s sole or main residence, being goods whose installation is necessary for the installation, maintenance or repair of the central heating system.

7. Supplies consisting of the leasing of goods that form the whole or part of a central heating system installed in the sole or main residence of a qualifying person.

8. Supplies of goods that form the whole or part of a central heating system installed in a qualifying person’s sole or main residence and that, immediately before being supplied, were goods leased under arrangements such that the consideration for the supplies consisting in the leasing of the goods was, in whole or in part, funded by a grant made under a relevant scheme.

8A. Supplies, so far as not falling within Group 23 in Schedule 8, to a qualifying person of services of installing, maintaining or repairing a renewable source heating system in the qualifying person’s sole or main residence.

8B. Supplies, so far as not falling within Group 23 in Schedule 8, of goods made to a qualifying person by a person installing, maintaining or repairing a renewable source heating system in the qualifying person’s sole or main residence, being goods whose installation is necessary for the installation, maintenance or repair of the system.

9. Supplies to a qualifying person of services of installing qualifying security goods in the qualifying person’s sole or main residence.

10. Supplies of qualifying security goods made to a qualifying person by a person who installs those goods in the qualifying person’s sole or main residence.

Supply only included so far as grant-funded

(1) Each of items 1 to 7 and 8A to 10 applies to a supply only to the extent that the consideration for the supply is, or is to be, funded by a grant made under a relevant scheme.

(2) Item 8 applies to a supply only to the extent that the consideration for the supply:

(a) is, or is to be, funded by a grant made under a relevant scheme; or

(b) is a payment becoming due only by reason of the termination (whether by the passage of time or otherwise) of the leasing of the goods in question?

Meaning of 'qualifying person'

(1) For the purposes of this Group, a person to whom a supply is made is 'a qualifying person' if at the time of the supply he—

(a) is aged 60 or over; or

(b) is in receipt of one or more of the benefits mentioned in sub-paragraph (2).

(2)Those benefits are—

(a) council tax benefit under Part 7 of the Contributions and Benefits Act;

(b) disability living allowance under Part 3 of the Contributions and Benefits Act or Part 3 of the Northern Ireland Act;

(c) any element of child tax credit other than the family element, working tax credit, housing benefit or income support under Part 7 of the Contributions and Benefits Act or Part 7 of the Northern Ireland Act;

(d) an income-based jobseeker’s allowance within the meaning of section 1(4) of the Jobseekers Act 1995 (c. 18) or Article 3(4) of the Jobseekers (Northern Ireland) Order 1995 (S.I. 1995/275 (N.I. 15));

(e) disablement pension under Part 5 of the Contributions and Benefits Act, or Part 5 of the Northern Ireland Act, that is payable at the increased rate provided for under section 104 (constant attendance allowance) of the Act concerned;

(f) war disablement pension under the Naval, Military and Air Forces Etc. (Disablement and Death) Service Pensions Order 1983 (S.I. 1983/883) that is payable at the increased rate provided for under article 14 (constant attendance allowance) or article 26A (mobility supplement) of that Order.

(g) personal independence payment under Part 4 of the Welfare Reform Act 2012 or the corresponding provision having an effect in Northern Ireland;

(h) armed forces independence payment under a scheme established under section 1 of the Armed Forces (Pensions and Compensation) Act 2004.

(i) universal credit under Part 1 of the Welfare Reform Act 2012 or Part 2 of the Welfare Reform (Northern Ireland) Order 2015].

(3) In sub-paragraph (2)—

(a) 'the Contributions and Benefits Act' means the Social Security Contributions and Benefits Act 1992 (c. 4) and

(b) 'the Northern Ireland Act' means the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (c. 7).

Meaning of 'qualifying security goods'

For the purposes of items 9 and 10 'qualifying security goods' means any of the following—

(a) locks or bolts for windows;

(b) locks, bolts or security chains for doors;

(d) smoke alarms.

Meaning of 'relevant scheme'

(1) For the purposes of this Group a scheme is a 'relevant scheme' if it is one that satisfies the conditions specified in this paragraph.

(2) The first condition is that the scheme has as one of its objectives the funding of the installation of energy-saving materials in the homes of any persons who are qualifying persons.

(3) The second condition is that the scheme disburses, whether directly or indirectly, its grants in whole or in part out of funds made available to it in order to achieve that objective

(a) by the Secretary of State or Ministers of any of the devolved tax administrations of the UK.

Previous ESM legislation

To 31 January 2024

The following supplies, found in Group 23 Sch 8 VATA 1994, are zero-rated supplies relating to energy-saving goods.

These rules apply:

From 1 April 2022 until 31 March 2027 in Great Britain.
From 1 May 2023 until 31 March 2027 in Northern Ireland.

Before those dates, these supplies largely qualified for the reduced rate of VAT (5%), with certain exceptions (wind and water turbines).

Unless the government extends the zero rating, from 1 April 2027, ESMs will revert to the reduced rate of 5%.

Note: the legislation below is as it stood for supplies before 1 February 2024, before the extension of the relief.

Group 23

1. Relevant supplies of services of installing energy-saving materials in residential accommodation.

2. Relevant supplies of energy-saving materials by a person who installs those materials in residential accommodation.

Meaning of 'energy-saving materials'

(a) Insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings.

(b) Draught stripping for windows and doors.

(d) Hot water system controls.

(e) Solar panels.

(f) Wind turbines.

(g) Water turbines.

(h) Ground source heat pumps.

(i) Air source heat pumps.

(j) Micro combined heat and power units.

(k) Boilers designed to be fuelled solely by wood, straw or similar vegetal matter.

Meaning of 'residential accommodation'

For the purposes of Group 23 'residential accommodation' means:

(a) a building, or part of a building, that consists of a dwelling or a number of dwellings.

(b) a building, or part of a building, used for a relevant residential purpose.

(d) a houseboat.

(2) For the purposes of this Group 'use for a relevant residential purpose' has the same meaning as it has for the purposes of Group 1 (see paragraph 7(1) of the Notes to that Group).

(3) In sub-paragraph (1)(d) 'houseboat' has the meaning given by paragraph 7(3) of the Notes to Group 1.

Meaning of 'relevant supplies'

For the purposes of Group 23 'relevant supplies means supplies made:

(a) where the residential accommodation is in England, Wales or Scotland, on or after 1 April 2022 and before 1 April 2027.

(b) where the residential accommodation is in Northern Ireland, on or after 1 May 2023 and before 1 April 2027.

Pre-1 April 2022 in Great Britain, and pre-1 May 2023 In Northern Ireland

The following supplies relating to ESMs, previously found in Group 2 Sch 7A VATA 1994, were reduced rated prior to 1 April 2022 in Great Britain, and 1 May 2023 In Northern Ireland.

Group 2

1. The supply of services for installing energy-saving materials in residential accommodation, where the energy-saving materials are not supplied by the person supplying the services.

2. The supply of services for installing energy-saving materials in residential accommodation, including the energy-saving materials installed, where:

(a) The supply is made to a qualifying person and the residential accommodation is the qualifying person’s sole or main residence.

(b) The supply is made to a relevant housing association.

3. The supply, in a case not falling within item 2, of services of installing energy-saving materials in residential accommodation, including the energy-saving materials installed (but see Note A1).

Note A1 Restriction on item 3

Item 3 does not apply to a supply so far as relating to the energy-saving materials installed if the open market value of the supply of the materials exceeds 60% of the cost of the total supply to the person to whom it is made.

The reference to cost is to cost net of VAT.

Note: this restriction is removed in Great Britain from 1 April 2022 and in Northern Ireland from 1 May 2023.

Meaning of 'energy-saving materials'

(a) Insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings.

(b) Draught stripping for windows and doors.

(d) Hot water system controls.

(e) Solar panels.

(f) –

(g) –

(h) Ground source heat pumps.

(i) Micro-combined heat and power units. air source heat pumps.

(j) Micro-combined heat and power units.

(k) Boilers designed to be fuelled solely by wood, straw or similar vegetal matter.

Note: wind and water turbines are added from 1 April 2022 (GB) or 1 May 2023 (Northern Ireland).

Observations on interpretation (Judge Richards, in Pinevale)

There is a distinction between Note 1(a), which specifies insulation 'for walls, floor, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings' and paragraphs (c) to (j) which specify particular products such as central heating system controls or solar panels.
A material that is insulation for a roof is not the same thing as the roof itself. It presupposes that there is a roof to which the insulating material is applied. If the intention had been to apply the reduced rate of VAT to energy-efficient roofs or walls, this could have been specified, just as more generally building materials are specified in Schedule 8.
The same point can be made with respect to water tanks. It is not energy-efficient water tanks, such as those which incorporate insulation as part of their construction, which attract the reduced rate of VAT, but insulation for water tanks. Again, it presupposes that there is a water tank to which an insulating material is attached or applied.

As energy-saving materials and techniques develop so does the law in this area.

Meaning of 'residential accommodation'

For the purposes of Group 2 'residential accommodation' means—

(a) a building, or part of a building, that consists of a dwelling or a number of dwellings;

(b) a building, or part of a building, used for a relevant residential purpose;

(d) a houseboat.

(2) For the purposes of this Group 'use for a relevant residential purpose' has the same meaning as it has for the purposes of Group 1 (see paragraph 7(1) of the Notes to that Group).

(3) In sub-paragraph (1)(d) 'houseboat' has the meaning given by paragraph 7(3) of the Notes to Group 1.

Meaning of 'qualifying person'

For the purposes of this Group 'qualifying person' has the same meaning as it has for the purposes of Group 3 (see next tab).

Note: this restriction is removed in Great Britain from 1 April 2022 and in Northern Ireland from 1 May 2023.

Meaning of 'relevant housing association'

For the purposes of this Group 'relevant housing association' has the meaning given by Note (21) of Group 5 of Schedule 8 (zero-rating: construction of buildings etc.).

Cases

Insulated roof panels

In HMRC v Pinevale Limited [2014] UKUT 0202 (TCC), the Upper Tribunal found that roof panels installed in conservatories were not energy-saving materials as they constituted a new roof rather than insulation for an existing roof.

In HMRC v Wetheralds Construction Limited [2018] UKUT 173 (TCC), the Upper Tribunal overturned the decision of the First Tier Tribunal, finding that the reduced rating did not apply to Wetheralds' Solid Roof System, relating to the roofing of a conservatory. The system was designed to improve the thermal insulation of a conservatory and could be used with an existing conservatory glazing bar framework.

As the installation involved the removal of the old roof covering and replacement with plasterboard, soffits, rainwater drainage and the new lightweight tiles, it was the supply of a roof, not just roof insulation meaning that it could not qualify for a reduced rating.

In Greenspace (UK) Ltd v HMRC [2023] EWCA Civ 106, the Court of Appeal (CoA) found that insulated conservatory roof panels were not insulation for the purposes of VAT-reduced rating.

The question was whether the supplies were ‘insulation for roofs’ using those words in their ordinary sense.
If the supply in question were of something more than, or different from, insulation for roofs, the reduced rate would not apply.
While a supply may have insulating properties, if that supply extends beyond what might fairly be described as insulation for roofs it will not fall within reduced rating.

Greenspace was not making a supply of insulation for roofs as while the panels did provide insulation for the conservatory on which they were installed, they also protected the conservatory from the outside elements. This was something more than a supply of insulation for roofs.

The CoA considered the Upper Tribunal cases of Pinevalue and Wetheralds (above). While it agreed with the general approach and reasoning of both Tribunals, it did not accept that the relevant test was whether the supply was of insulation for roofs or a roof, but simply whether the supply was of insulation for roofs.

The CoA concluded that the test in Pinevalue and Wetheralds went too far in suggesting a binary choice between insulation for roofs on the one hand and a roof on the other.

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