The Green Homes Grant and VAT

10 July 2020

10 July 2020 by John Rossiter VAT

In his Summer Economic Update, the Chancellor confirmed that a £2bn scheme is to be introduced in September to allow all homeowners and landlords in England to apply for a grant to help cover the cost of upgrading residential properties to make them more energy efficient.

The grants will cover two thirds of the cost of upgrades to a maximum of £5,000 for most properties.  Low income households will be eligible to apply for a grant to cover all costs up to a maximum of £10,000. 

While this is aimed at a longer term ambition for a greener future, the shorter term goal is to help create and retain jobs in the construction sector by providing an additional or increased source of income.

With respect to the scheme itself, details of what the grant will cover have yet to be released, but it is anticipated that energy saving materials such as insulation, double glazing, energy efficient heating systems, and energy efficient lighting will be included.  The process is likely to be that homeowners and landlords will apply on-line, and will be directed to accredited suppliers who will provide quotes.  Once a quote has been approved and accepted, the government will issue a voucher to cover its share of the eligible cost.  Your first action should be to ensure that you are on the list of accredited suppliers.

The impact of VAT

When it comes to quoting for work, and ultimately doing the work and billing for it, you will need to know what rate of VAT should be applied.  VAT does apply at a reduced rate of 5% for the installation of certain energy saving materials, but it does not apply to all types of energy saving materials, and it does not apply in all circumstances.  So for pricing purposes, and for working out your margins, you will want to know whether you’ll be charging VAT at 5% or 20%, or part at 5% and part at 20%. Getting it wrong can mean the difference between making a profit and making a loss.

Reduced rate of VAT

Determining when the reduced rate of VAT applies can be a complex area to navigate, and I would recommend getting advice on this to a) make sure your forecast margins are right, and b) reduce the risk of future possible assessments from HMRC if you get it wrong.

In broad terms, reduced rating applies to:

services of installing energy-saving materials, including the energy-saving materials installed, for someone over the age of 60 or for someone who is on certain benefits where the installation is in their sole or main residence (“The social policy conditions”), or where this is not met

services of installing energy-saving materials in residential accommodation, including the energy-saving materials installed, unless the value of the materials exceeds 60% of the cost of the total supply  made, in which case it is necessary to charge VAT at the standard rate on the materials.  The labour element can still be reduced rated.

Energy-saving materials for these purposes means; insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings; draught stripping for windows and doors; central heating system controls; hot water system controls; solar panels; ground source heat pumps; micro combined heat and power units. air source heat pumps; micro combined heat and power units; and boilers designed to be fuelled solely by wood, straw or similar materials.

Reduced rating also applies to certain grant-funded installations of heating equipment and renewable source heating systems supplied to the over 60s or those on certain benefits, but only to the extent of the grant amount.

What Steps Should I Take?

There will clearly be an interaction between the Green Homes Grant and the possible application of VAT at the reduced rate.

To prepare your business you should:

  • Make sure you are included on the list of accredited suppliers
  • Get to grips with when the reduced rate of VAT applies, so that you:
    • know what you need to ask your prospective customers to determine if the lower rate applies
    • price your quotes appropriately, maximise your margins, and allow your clients to take full advantage of the grant available, and
    • know what information you will need obtain and keep to support the VAT treatment you apply.

Find out more 

Contact our Indirect Tax team today for more information or visit our Spotlight On: UK Economic Update page to read more of our exclusive coverage of this key Government update and to sign up to our special webinar with Global Economist, Professor Joe Nellis.