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Cus & Ex 1

25 November 1997

CE 1: VAT cut on energy saving brings better insulation to 40,000 homes a year

Some 40,000 extra households each year will keep warmer as a result of the Government’s decision to cut to 5 per cent the VAT on the installation of energy saving materials for the less well-off under certain Government-funded schemes, to be enacted in the next Budget.

The measures, set out in today’s Pre-Budget report, follow a Government study to be made available tomorrow, and mean that the Home Energy Efficiency Scheme (HEES) and similar Government schemes should benefit by an extra 7.5 million pounds.

The Government intends to explore with its European partners the possibility of a wider reduced VAT rate for energy saving materials.

Financial Secretary Dawn Primarolo said today:

"These measures reflect the Government’s commitment to helping the less well-off to keep warm."

A summary of the report is attached. The full report will be available tomorrow.

Notes for editors

1. A review was announced in a Budget News Release on 2 July 1997, Helping the Less Well-off to Save Energy. The news release stated that the main aim of the review was ‘to identify the most effective and efficient ways of helping those on low incomes to reduce the consumption of fuel they need to keep warm’ and whether or not a reduced rate of VAT for energy saving materials (ESMs) was the best way to achieve that goal. The report published tomorrow is the result of the review.
2. VAT on domestic fuel and power was reduced from 8 per cent to 5 per cent in the Summer Budget, with effect from 1 September 1997. VAT on energy saving materials and their installation is currently 17 1/2 per cent.
3. Current EC VAT law does not allow a general relief for ESMs bought for DIY installation, because they do not feature in the list of permitted reduced rates.

Press inquiries only to:

HM Customs and Excise
Public Relations Office
New King's Beam House
22 Upper Ground
London
SE1 9PJ
Telephone: 0207 865 5468/5471

Others should contact their local VAT Business Advice Centre, listed under Customs and Excise in the telephone book.

The report itself may be seen at the customs web site

In addition, single copies may be obtained from :

Anthony McGowan, HM Customs & Excise
Commercial Division
VAT Policy Directorate
4th Floor West
New King’s Beam House
22 Upper Ground
London
SE1 9PJ.
(Dial Direct 0207 865 4794 or Fax 0207 865 4824

Helping the Less Well-off to Save Energy: Report summary

A review was announced in the Summer Budget to look at ways of helping the less well-off keep warm and of reducing emissions, focusing particularly on the scope for VAT relief.

The majority of those who responded to the consultation were in favour of a reduced rate of VAT, and many called for the negotiation of amendments to European VAT law to enable this.

Research into housing conditions nation-wide suggest that the case for promoting energy efficiency is strongest for households at the bottom end of the income scale who need to spend the highest proportion of their income to keep warm. This points to increasing the resources available to grant-funded schemes that help the less well-off, particularly those receiving benefits, to increase the energy efficiency of their homes. This could be done through a reduced rate of VAT for works funded by such schemes.

The benefit of improvements to households which have difficulty keeping warm is not likely to have a large effect on CO2 emissions, because of the extent to which such households need the benefit to keep warmer, rather than reduce their consumption of energy.

A wider VAT relief would have the potential for a greater positive impact on emissions, but European law restricts the relief that can currently be offered through the VAT system. In particular it does not allow a reduced rate for the sale of energy saving materials for DIY.

Conclusion

A limited VAT relief now, based on installations under existing grant schemes, could help fund improvements to 40,000 more households each year, and act as another signal of the importance attached to energy efficiency. It would combine effective targeting of those least able to keep warm, ease of administration, and legal certainty.

In the medium term the Government could explore with its partners in Europe the possibility of a reduced rate of VAT for a wider range of installations and DIY purchases of energy saving materials. This might offer new incentives for energy conservation to all households.

External links

• Customs & Excise web site

Pre Budget 1997 Press Notices index page

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