The Manufacturing team at accountancy association MHA release a quarterly series called The Engine; these provide a national outlook on the issues facing the manufacturing market.

An overview
From October 1st 2019 the scope of the VAT reduced rate (5%) for energy saving materials was restricted to comply with EU law. The UK rules were found to go beyond what is permitted under EU law. Supplies which would previously have qualified for the reduced rate, now only qualify if they meet the new and more restrictive tests which are noted below. This is not good news for the sector or the environment.

What are the changes?
From October 1st 2019 the reduced rate only applies to the installation of energy saving materials (and energy saving materials supplied with installation), where the supply meets one of the new social policy conditions noted below, or a new 60% test is met in relation to materials.

The reduced rate has been removed for wind and water turbines. The installation of these turbines is subject to VAT at the standard rate of 20%. Solar panels have been retained in the scope of the reduced rate.

Social Policy Conditions
Condition 1: The supply of the installation is to a ‘qualifying person’ and in the qualifying person’s sole or main residence.

A qualifying person is a person who is:

• Aged 60 or over, or
• is in receipt of certain benefits, such as Child Tax Credit (other than the family element), Council Tax Benefit, Disability Living Allowance, Disablement Pension, Housing Benefit, Income-based Jobseeker’s Allowance, Income Support, War Disablement Pension and Working Tax Credit.

Condition 2: The supply of the installation is to a ‘relevant housing association’, which includes registered social landlords and registered housing associations.

Condition 3: The supply of the installation in residential accommodation is in a building or part of a building used solely for a ‘relevant residential purpose’. This includes children’s homes, care homes, etc.

Note: subcontractors are unlikely to meet Condition 1 or 2 as they supply a main contractor and may need to rely on the 60% test below for reduced rating.

60% Test
Where one of the above social policy conditions is not met, it is necessary to look at the new 60% test for materials. 

If the open market value purchase price (excluding VAT) of all goods supplied to the customer (as part of the installation which remain in place once the job has been completed) is greater than 60% of the total value of the supply to a customer (excluding VAT), an apportionment is now required between materials (which will become standard rated) and labour (which will be reduced rated). Sounds complicated…

Example 1:
A contractor pays £500 (excluding VAT) for material and charges its customer £1,000 (excluding VAT) for the installation.

Since the cost of materials is only 50% of the value of the total supply, the contractor can charge the reduced rate of 5% on the total supply i.e. 5% of £1,000 = £50.

Example 2:
A contractor pays £7,500 for materials (excluding VAT) and charges its customer £10,000 (excluding VAT) for the installation.

Since the cost of the materials is 75% of the value of the supply, the supplier will need to separately identify the value of the materials and charge VAT at the standard rate on the supply of those materials to its customers. The labour element of the supply will continue to qualify for the reduced rate.

Supplies where the material cost is likely to be a high proportion of the value of the supply e.g. solar panels, will not generally be eligible for reduced rating unless one of the above social policy conditions is met, which could have a significant impact.

Who is impacted?
Any contractor or subcontractor installing energy saving materials including:

• Controls for central heating and hot water
• Systems draught stripping
• Insulation
• Solar panels
• Wind turbines
• Water turbines
• Ground source heat pumps
• Air source heat pumps
• Micro combined heat and power units
• Wood-fuelled boilers

For more information get in touch with our friendly team of tax and business advisers by contacting Dan on 01903 234094 or visit our website: www.carpenterbox.com