Brussels tells UK to up VAT on energy saving materials or face Court of Justice

VAT on installation and purchase of insulation, microgeneration and heatpumps could jump from the current 5 per cent to 20 per cent after the European Commission said the UK's reduced rate contravenes EU policy.

In a statement (here) the Commission said it had asked the UK to amend its legislation. If the legislation is not brought into compliance within two months, the Commission said it may refer the matter to the European Court of Justice.

The seemingly perverse move is likely to baffle industry. A Treasury spokesperson said it “did not agree with the Commission” and “would not have introduced a reduced rate if we thought it was not allowed.” Treasury will “study the Commission’s argument carefully”, she added.

The department of energy and climate change could not say what impact the issue may have on flagship energy efficiency programmes such as the Green Deal. However, if the Treasury is forced to scrap VAT relief on the elements listed here it could make meeting the Golden Rule – where the cost of measures cannot exceed the reduction in energy bills they deliver – much more difficult to meet.