Many people don’t realise that that VAT (Value Added Tax) is charged on building works to existing homes, but not on new builds. It’s hugely frustrating that projects to improve the energy efficiency of existing homes are 20% more expensive than building new. However, all that seemed to have changed with the Government’s announcement of a new zero rate for energy-saving materials and heating equipment in April 2022. Hooray! At last, retrofit would be treated equally with new build. Or would it? For the dedicated, you can read the notice here:
https://www.gov.uk/guidance/vat-on-energy-saving-materials-and-heating-equipment-notice-7086
VAT on construction is a tax collected by builders on behalf of the government. It is up to my builder to decide whether or not it is chargeable, to collect the money and to hand it over to HMRC. If my builder makes the wrong decision, doesn’t charge me VAT and the HMRC later comes looking for it, he is left with a large liability. So – understandably – he wants to be 100% sure of the VAT status of my energy efficient project, and wants a clear statement from HMRC confirming this.
The new zero rate is unfortunately very unclear. Can an entire comprehensive deep retrofit be zero rated? Or is it intended for smaller projects of individual, piecemeal improvements – an air source heat pump here, some PV Panels there?
I did lots of research on the web, but couldn’t find anything helpful. I had a thorough read of the VAT notice itself: the crucial bit is what is defined as ‘ancillary’ to the main supply. My main supply is insulation in the walls, under the floor and in the roof. To work effectively, the insulation must be as continuous as possible, avoiding gaps and installed with an air-tight membrane to prevent air movement. Achieving this requires ancillary goods and services – for example, the installation of a mechanical ventilation system to prevent mould and condensation as a result of the improved insulation and air tightness.
I sought advice from a VAT specialist. She advised a due diligence approach for my builder, recording the decision-making on the project to present as evidence in the future should the HMRC query the project. She was clear that getting a statement out of HMRC was very unlikely – they would probably simply refer me back to the VAT Notice. I tried anyway and – unsurprisingly – the expert advice was right: in my phonecall, HMRC could not understand why I felt things were not clear and referred me back to the guidance. I followed up with a written query online back in August 2022, and have not heard back. I’m not holding my breath.
Every retrofit project is different, so each needs to be assessed for VAT liability on its own merits. But I’d really welcome any thoughts or experience others have had. I believe that this project should be zero-rated but – unless I can provide my builder with definitive guidance – we’re going to need that 20% in my budget for VAT.
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