Energy-saving materials

From 1 February 2024, the VAT zero rating on the installation of energy-saving materials (ESMs) was extended to cover an increased number of materials. Here we give an overview of the scheme and what the changes were.

Group 23 Schedule 8 VATA 1994 specifies that the installation of ESMs is currently zero-rated for supplies made between 1 April 2022 (1 May 2023 in Northern Ireland) and 31 March 2027. Supplies of ESMs were previously reduced rated at 5% and will revert to the reduced rate from 1 April 2027.

The relief applies to the services of installing ESMs in residential accommodation and, from 1 February 2024, buildings intended to be used solely for a relevant charitable purpose. ‘Relevant charitable purposes’ means use either by a charity for non-business purposes or as a village hall or similar for a local community. The supply of ESMs without installation is standard rated.

ESMs include certain controls for central heating and hot water, insulation, solar panels and other energy generation systems and air and ground source heat pumps. From 1 February 2024, zero rating additionally applies to:

• electricity battery storage that is retrofitted to a qualifying ESM e.g. a solar panel (previously only qualified when installed in conjunction with an ESM).
• installation of standalone batteries for storing electricity from the grid or a microgeneration system
• water source heat pumps
• retrofitting of smart diverters (which automatically divert electricity generated from a microgeneration system to electrical appliances in the building)
• certain groundworks or dredging necessary to install pipework or other equipment for a ground or water source heat pump.

Care will need to be taken where other goods and services are supplied at the same time as to whether there is a single supply which can benefit from zero rating or a mixed (or multiple) supply.

Currently, zero rating is temporary and only available until 31 March 2027; however, it is possible that the government will choose to extend the relief or make it permanent.

Further details on the zero rating, including a list of ESMs covered by zero rating, are available in VAT Notice 708/6.