1. Overview
1.1 This notice
This notice explains when the installation of energy-saving materials and heating equipment is reduced-rated in Northern Ireland and zero-rated in Great Britain (England, Scotland and Wales).
Information on the liability of other building work is explained in Buildings and construction (VAT Notice 708) and Reliefs from VAT for disabled and older people (Notice 701/7).
1.2 Who should read this notice
You should read this notice if you’re a contractor or subcontractor installing:
- energy-saving materials
- grant-funded heating equipment
1.3 The law
The VAT Act 1994, section 29A (as inserted by the Finance Act 2001) holds that goods and services specified in schedule 7A to the act are reduced-rated.
Schedule 7A, group 2 (as amended by The Value Added Tax (Reduced Rate)(Energy-Saving Materials) Order 2019) specifies when installations of energy-saving materials in Northern Ireland are reduced-rated.
Schedule 7A, group 3 specifies when grant-funded installations of heating equipment and security goods are reduced-rated.
The VAT Act 1994, section 30 holds that goods and services specified in schedule 8 to the act are zero-rated.
Schedule 8, group 23 (as inserted by the Value Added Tax (Installation of Energy-Saving Materials) Order 2022) specifies when installations of energy-saving materials in Great Britain are zero-rated during the period 1 April 2022 to 31 March 2027.
You can find more information about current rates of VAT.
2. Installations of energy-saving materials
2.1 Reduced-rated and zero-rated installations
From 1 April 2022 until 31 March 2027 a zero rate applies to the installation of certain specified energy-saving materials (read paragraph 2.9) in, or in the curtilage, of residential accommodation in Great Britain (read paragraph 2.20). Neither the social conditions test, nor the 60% test detailed in paragraph 2.4 will need to be applied.
In Northern Ireland, the reduced rate continues to apply to the installation of certain specified energy-saving materials (read paragraph 2.9) in, or in the curtilage of residential accommodation (read paragraph 2.20).
The reduced rate applies whether or not the installation is grant funded and includes the price of the goods themselves. However, an installation of energy-saving materials in residential accommodation only benefits from the reduced rate where either:
- one of the social policy conditions is satisfied (read paragraph 2.3)
- the 60% threshold is not exceeded (read paragraph 2.4)
Where the 60% threshold is exceeded, the value of the supply will need to be apportioned between materials and labour.
The materials element of the supply will be standard-rated while the labour element will continue to benefit from the reduced rate.
In practice, the 60% threshold is expected to affect mainly combined installations of solar panels and batteries.
If you supply energy-saving materials without installing them (that is, only those materials), your supply is standard-rated across the UK. For example, the sale of energy-saving materials by a retailer is standard-rated.
If you provide only services of installing certain specified energy-saving materials (that is — no materials), your supply, if supplied in Great Britain will be zero-rated, and if supplied in Northern Ireland reduced-rated.
For example, a customer employs a business to install energy-saving materials that the customer purchased directly from a retailer. The installation only of wind and water turbines in Northern Ireland will remain subject to the standard rate.
2.2 Installation
Installation, in this context, means putting in place energy-saving materials.
This involves some process by which materials are permanently fixed in place, although loft insulation may simply need to be unrolled and positioned in place to be installed.
2.3 Social policy conditions applicable in Northern Ireland
The installation of energy-saving materials in residential accommodation in Northern Ireland is reduced-rated when any one of the social policy conditions is satisfied.
The first condition is that the supply of the installation is to a ‘qualifying person’ in the qualifying person’s sole or main residence. A qualifying person is defined in legislation as a person who is aged 60 or over, or is in receipt of one of the following benefits:
- 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
- Working Tax Credit
The second condition is that the supply of the installation is to a ‘relevant housing association’ as defined in legislation which includes a registered social landlord and registered housing association.
The third condition is where the residential accommodation is a building or part of a building used solely for a ‘relevant residential purpose’ as defined in legislation. This includes children’s homes, care homes and accommodation for the armed forces.
2.4 The 60% test applicable in Northern Ireland
Where the social policy conditions are not met, it is necessary to apply the 60% test to a supply of installing energy-saving materials. The business, which provides the services of installation, has to calculate the VAT to charge.
It must first establish the price that it paid to purchase the materials (excluding VAT) used in the installation and calculate this as a percentage of the total value of its supply (excluding VAT) to its customer. The materials that must be included in this calculation are all of the goods supplied to the customer as part of the installation which remain in place once the job has been completed.
For example, a business installs insulation in a residential property. It pays £400 (excluding VAT) for the insulation material and charges its customer £1,000 (excluding VAT) for the installation. Since the cost of the materials to the business is only 40% of the value of the supply that the business makes to its customer, the business can charge the reduced rate of 5% on the total supply, that is 5% of £1,000 = £50.
However, where the 60% threshold is exceeded (that is, where the percentage is 61% or more using normal rounding conventions), the business will need to carry out an apportionment. This requires the business to apportion the value of the total supply that it makes to its customer, between materials (which will be standard-rated) and labour (which will be reduced-rated).
For example, a business carries out an installation of solar panels combined with a battery. It pays £5,000 for the solar panels and battery (excluding VAT) and charges its customer £7,500 (excluding VAT) for the installation.
Since the cost of the materials to the business is 67% of the value of the supply the business makes to its customer, the 60% threshold is exceeded. This means that the business will need to separately identify the value of the materials supplied to its customer and charge VAT at the standard rate on the supply of those materials. The labour element of the supply will continue to qualify for the reduced rate.
2.5 Subcontractors in Northern Ireland
If you’re a contractor working on behalf of another business, you’re not making a supply to a ‘qualifying person’ or a ‘relevant housing association’, therefore you may need to apply the 60% test to a supply of installing energy-saving materials to determine whether your supply qualifies for the reduced rate.
2.6 New rules for installation of energy saving materials in Great Britain
The new rules effective from 1 April 2022 in Great Britain remove both the social conditions test and the 60% test for all installations of qualifying energy-saving materials in England, Scotland and Wales.
They also introduce a temporary zero rate on all installations of qualifying energy-saving materials that are made on or after 1 April 2022 up to and including 31 March 2027.
On 1 April 2027 the installation of qualifying energy-saving materials in Great Britain will revert to the reduced rate of 5%.
2.7 Energy-saving materials installed with other works
It is common for other goods and services to be provided at the same time as the installation of energy-saving materials. The paragraphs at 2.7.1, 2.7.2, 2.7.3, 2.7.4 give general guidance with examples of the VAT liability of these works which should help identify the correct VAT treatment.
These examples may not apply if the contractual position between you and your customer is different to the examples or if there are other supplies or activities taking place at the same time.
2.7.1 Installation of energy-saving materials only
The installation of certain specified energy-saving materials is zero-rated in Great Britain.
The reduced-rate will apply in Northern Ireland provided that either one of the social policy conditions is satisfied, or the 60% threshold is not exceeded. For example, visiting a home owner solely to install cavity wall insulation or to draught strip all the windows and doors.
2.7.2 Installation of energy-saving materials with ancillary supplies
The installation of certain specified energy-saving materials with ancillary supplies is zero-rated in Great Britain.
The installation of energy-saving materials with ancillary supplies in Northern Ireland is reduce rated, provided that any one of the social policy conditions is satisfied or the 60% threshold is not exceeded.
When carrying out the 60% test it is necessary to include the cost of all of the goods supplied to the customer including those that are ancillary to the energy-saving materials.
An ancillary supply is a supply of goods or services that is a better means of enjoying the principal supply, for example, installing loft insulation but having to cut a new loft hatch in the ceiling and making good to access the loft. The cutting of the loft hatch and making good is, in itself, a simple construction supply, but as the services have been carried out solely in support of the loft insulation, they become ancillary.
However, if you replace your existing roof with a new insulated one, the insulation clearly is a better way of enjoying the new roof and so the insulation is ancillary to the new roof. As the supply of the roof is standard-rated, this applies to the whole supply, including the insulation.
Another example is the installation of an air source heat pump together with new radiators and pipework in residential accommodation.
This is carried out as a single job and for a single price. Larger radiators and pipes are necessary because the air source heat pump operates at a lower temperature than a traditional gas boiler. The customer regards the work as one supply of an air source heat pump.
In this example, the installation of the new radiators and pipework are ancillary to the installation of the air source heat pump.
This single supply benefits from the zero rate in Great Britain or reduced rate in Northern Ireland (subject, in Northern Ireland, to one of the social policy conditions being satisfied or the 60% test being met).
2.7.3 Installation of energy-saving materials with other goods and services
Sometimes, when individual goods and services are provided together, there is not a single dominant supply and the individual goods and services supplied together have equal importance but take the form of something else.
For example, a central heating system may consist of a conventional boiler, radiators, copper pipe, radiator valves, heating controls and so on. Supplied on their own, they are separate supplies in their own right but, supplied together, they form a single supply of a central heating system.
While some components of the central heating system may be either zero-rated in Great Britain or reduced-rated in Northern Ireland if supplied and installed on their own, where they are all supplied together, they form part of a single supply of a central heating system.
Since a central heating system is not included in the list of energy saving materials eligible for either the zero or the reduced rate (read paragraph 2.9 and 2.10), the whole supply is standard-rated.
A further example would be the construction of an extension of a house. While the walls and roof space would be insulated, this is just one part of the construction of the whole extension and since the construction of an extension is standard-rated, the whole supply is standard-rated.
However, the installation of a central heating systems may still be subject to the reduced rate if grant funded (read paragraph 3.3).
2.7.4 Mixed supplies
Where you’re undertaking more than one job at the same premises, the VAT liability will depend upon the circumstances.
For example, if you’re contracted to build an extension and, as part of the same contract required to fit thermostatic valves to all the radiators in the house, this is a single standard-rated supply of construction services.
However, if you have a contract to build an extension and sometime after the work has commenced, the homeowner separately asks you to install thermostatic valves, this is a separate supply.
This separate supply will be zero-rated in Great Britain.
In Northern Ireland, it will be reduced-rated provided that one of the social policy conditions is satisfied or the 60% threshold is not exceeded.
2.8 New dwellings
If you install energy-saving materials during the course of construction of a new dwelling, your supply is zero-rated. If you’re involved in the construction of new dwellings you should consult Notice 708: buildings and construction.
2.9 Energy-saving materials covered by the reduced rate in Northern Ireland
Subject to one of the social policy conditions being satisfied or the 60% threshold not being exceeded, the reduced rate applies to the installation of the following energy-saving materials:
- controls for central heating and hot water systems (read paragraph 2.10)
- draught stripping (read paragraph 2.11)
- insulation (read paragraph 2.12)
- solar panels (read paragraph 2.13)
- ground source heat pumps (read paragraph 2.17)
- air source heat pumps (read paragraph 2.18)
- micro combined heat and power units (read paragraph 2.19)
- wood-fuelled boilers (read paragraph 2.20)
2.10 Energy-saving materials covered by the zero rate in Great Britain
The zero rate applies to the installation of the following energy-saving materials:
-
all energy-saving materials as listed in 2.9
-
wind turbines (read paragraph 2.15)
-
water turbines (read paragraph 2.16)
2.11 Controls for central heating and hot water systems
Central heating and hot water system controls include:
- manual or electronic timers
- thermostats
- mechanical or electronic valves, including thermostatic radiator valves
2.12 Draught stripping
Draught stripping products are strips that are fixed around windows, interior and exterior doors, and loft hatches to reduce draughts.
2.13 Insulation
Insulation means materials that are designed and installed because of their insulating qualities.
This includes insulation for:
- walls
- floors
- ceilings
- roofs or lofts
- water tanks, pipes or other plumbing fittings
The zero or reduced rate does not apply to products such as curtains and carpets which are not usually installed simply as insulation.
2.14 Solar panels
Solar panels include all systems that are installed in, or on the site of, a building and that are:
- solar collectors such as evacuated tube or flat plate systems, together with associated pipework and equipment, such as circulation systems, pump, storage cylinder, control panel and heat exchanger
- photovoltaic (PV) panels with cabling, control panel and AC/DC inverter
2.15 Wind turbines
From 1 April 2022 to 31 March 2027, the installation of wind turbines together with the installation of all equipment essential to the operation of wind turbines, including mounting poles, electrical cables, battery banks and voltage controllers is zero-rated in Great Britain.
After 31 March 2027, the reduced rate will apply to installations in Great Britain.
In Northern Ireland the installation of wind turbines continues to be standard-rated.
2.16 Water turbines
From 1 April 2022 to 31 March 2027, the installation of water turbines together with the installation of all equipment essential to the operation of water turbines, including electrical cables, battery banks and voltage controllers is zero-rated in Great Britain.
After 31 March 2027, the reduced rate will apply to installations in Great Britain.
In Northern Ireland the installation of water turbines continues to be standard-rated.
2.17 Ground source heat pumps
These transfer energy from the natural heat stored in the earth to heat the home and domestic hot water. They can also be used to augment existing heating systems in the same way as solar panels.
2.18 Air source heat pumps
Air source heat pumps use the air as a source of heat. They absorb heat from the outside or surrounding air and transfer that into useable heat in the home for space or water heating, or both.
Fixed air source heat pumps can be reversed so that they can draw heat from inside a building, thus providing cooling during the summer as well as indoor heating for colder periods of the year.
Only air source heat pumps that are permanently fixed and are not portable or moveable qualify as energy-saving materials.
HMRC’s understanding is that most air conditioning units are air source heat pumps. However, in cases of doubt, deciding whether any particular product is to be treated as an air source heat pump will depend on the facts of each case.
2.19 Micro combined heat and power units
These produce heat and hot water but, in addition, they also generate electricity.
2.20 Wood-fuelled boilers
These are boilers designed to be fuelled solely by wood (including wood chips and pellets), straw or similar vegetal matter.
Some boilers need hoppers to feed the fuel into the boiler. Where a hopper is integral to the installation of the boiler it’s included within the scope of the reduced rate in Northern Ireland and zero rate in Great Britain.
The standard rate applies to installations of ‘multi-fuel’ or ‘dual-fuel’ boilers which are designed to burn other non-renewable fuels such as coal or oil as well as wood. Stand-alone wood-burning stoves are also standard-rated.
The construction or conversion of buildings or extensions for use as log or fuel stores is standard-rated.
2.21 Residential accommodation
The installation of energy-saving materials only qualifies for the reduced rate in Northern Ireland or zero rate in Great Britain if they’re for use in types of residential accommodation, such as:
- houses, blocks of flats or other dwellings
- armed forces residential accommodation
- children’s homes
- homes providing care for the elderly, disabled people, or people who suffer or have suffered from drug or alcohol dependency or mental disorder
- hospices
- institutions that are the sole or main residence of at least 90% of their residents
- monasteries, nunneries and similar religious communities
- residential accommodation for students or pupils
- self-catering holiday accommodation
- caravans used as a place of permanent habitation (such as a park home or static caravans sited on a permanent residential caravan park)
- houseboats that are designed or adapted for permanent habitation and have no means of self-propulsion, or other boats which are used as a person’s sole or main residence, such as canal boats and Dutch barges, on which the boat owner pays Council Tax or domestic rates
The standard rate applies to the installation of energy-saving materials in hospitals, prisons or similar institutions, hotels or inns or similar establishments.
2.22 Other energy-efficient products
The reduced rate in Northern Ireland only applies to the installation of the energy-saving materials listed at paragraph 2.9.
The zero rate in Great Britain only applies to the installation of the energy-saving materials listed at paragraph 2.10.
The installation of all other energy-efficient products, such as energy-efficient boilers (but read section 3 if the installation is grant funded), secondary or double glazing, low-emissivity glass, or energy-efficient fridge freezers are standard-rated.
3. Grant-funded installations of heating equipment and security goods so far as not falling within group 23 of schedule 8 VATA94
3.1 Reduced-rated installations
The reduced rate applies to the grant-funded installation of certain heating appliances, central heating and renewable source systems in the sole or main residence of a qualifying person (read paragraph 3.8). The reduced rate applies to the whole of the UK.
This includes the price of the equipment itself.
The reduced rate only applies to the extent that the supply is grant funded (read paragraph 3.9) in so far as the supply does not fall within group 23 of schedule 8 VATA 94.
If you supply heating equipment without installing them your supply is standard-rated, even if it’s grant funded.
No changes were made to the reduced rate for grant funded installations as part of The Value Added Tax (Installation of Energy-Saving Materials) Order 2022.
3.2 Heating appliances
The reduced rate applies to the installation of:
- closed solid fuel fire cassettes
- electric dual immersion water heaters with factory-insulated hot water tanks
- electric storage heaters
- gas-fired boilers
- gas room heaters with thermostatic controls
- oil-fired boilers
- radiators
3.3 Central heating systems
The reduced rate applies to the installation, repair and maintenance of a boiler, radiators, pipework and controls forming a central heating system.
This includes micro combined heat and power systems, which are heating systems that also generate electricity.
The reduced rate includes repairs and replacements of such equipment, whether or not the original system was installed under a relevant grant-funded scheme.
3.4 Renewable source heating systems
The reduced rate applies to the installation, repair and maintenance of renewable source heating systems.
This means space or water heating systems which use energy from:
- renewable sources, including solar, wind and hydroelectric power
- near renewable sources, including ground and air heat
3.5 Security goods
The grant-funded scheme relating to security goods linked to the installation of energy-saving materials or central heating systems has now been withdrawn.
3.6 Connection or reconnection to the mains gas supply
Where a qualifying person has been disconnected from the mains and re-connection is paid for under a grant scheme, that reconnection is eligible for the reduced rate.
3.7 Leasing arrangements
Under some grant-funded schemes, a leasing arrangement may be used to help fund the installation of a central heating system. Where this happens, the installer will install the central heating system as usual, but they’ll sell the boiler and radiators to a leasing company. This supply is standard-rated.
The leasing company, which will then own the goods, will make an annual lease charge to the qualifying person, which will be paid by grant funding. This supply is taxed at the reduced rate.
Where a leasing arrangement is used to help fund the installation of a central heating system there are 2 types of payment that may become due besides the lease charge:
(a) termination fee — this is payable by the qualifying person or their landlord if the qualifying person moves to a new house during the 7-year lease period
(b) end of lease payment — the qualifying person must make a final payment to the lease company at the end of the lease period.
Both of these are further payments for the lease of the equipment and are eligible for the reduced rate.
3.8 A qualifying person
A qualifying person is a person who receives a grant for the installation of heating appliances (read paragraph 3.2) or for the installation, maintenance or repair of a central heating system (read paragraph 3.3) or for a renewable source heating system (read paragraph 3.4) and is either:
(a) aged 60 or over
(b) receives one or more of the following benefits:
- 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
- Working Tax Credit
If there are 2 or more people living in a dwelling, and one person is a qualifying person and the other residents are not, the reduced rate will apply if the supply is to the qualifying person, and they’re eligible for the grant.
In practice, for a supply to be to a qualifying person, that person will have to be responsible for ordering the work to be done.
3.9 Grant-funded schemes
The reduced rate is only available for supplies made under a grant scheme that has an objective of funding the installation of energy-efficiency measures in low income homes.
There’ll usually be no need to look at the formal basis of the grant scheme concerned.
In practice, the explanatory material issued by those who organise schemes will usually make it clear what they will pay for.
If the material published by or about a scheme makes it clear that it funds the installation of energy-savings materials and so on, and it actually operates in line with those commitments, then the scheme can be treated as having the objective outlined.
3.10 Grants covering more than the installation of heating equipment
Grant-funding bodies may make awards to fund the combined cost of the installation of central heating systems, or heating appliances, and other building work, requiring the householder to pay the balance.
If you carry out other work, such as building repairs or maintenance, at the same time, that element of the work is standard-rated.
You must make a fair and reasonable apportionment of the charge made.
3.11 Contributions from householders’ own resources
The reduced rate only applies to work that’s grant funded.
Where installation of central heating systems or heating appliances takes place in a house and the grant does not cover the full cost of the work, householders will make their own contributions.
The installations paid for by these contributions are standard-rated. Where you do work that’s paid for like this, you need to apportion your charge accordingly.
3.12 Contributions from other sources
In addition to grants from the main grant-awarding bodies, and contributions from householders’ own resources, additional grants or contributions may be made by others.
This extra help may come, for example, from local authority hardship funds.
Installations paid for by other supplementary grants or contributions may also come within the scope of the reduced rate, if they meet all the conditions.
Installations paid for by contributions from landlords do not qualify and are standard-rated.
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