Zero-rated VAT on energy-saving materials

The installation of qualifying energy-saving materials (ESMs) in homes is zero-rated for VAT until 31 March 2027, which means no VAT is added to the work. The zero rate has applied in England, Wales and Scotland since 1 April 2022 and in Northern Ireland since 1 May 2023. From 1 April 2027 it is set to revert to the reduced rate of 5%. The relief was announced at the Spring Statement in 2022 and sits in Group 23 of Schedule 8 to the Value Added Tax Act 1994, under section 30 of that Act.

The zero rate is a relief on installation. Buying the same equipment over the counter and fitting it yourself does not get it.

Which materials qualify for the zero rate

The relief applies to a defined list of materials, set out in HM Revenue and Customs (HMRC) guidance in VAT Notice 708/6. The original list, in force since 1 April 2022, covers:

Controls for central heating and hot water systems, including timers, thermostats and thermostatic radiator valves
Draught stripping
Insulation for roofs, walls, ceilings, floors, water tanks and pipes
Solar panels, both solar thermal collectors and PV panels, with their cabling, control panel and inverter
Wind turbines and their essential equipment, including mounting poles, cabling, battery banks and voltage controllers
Water turbines and their essential equipment
Ground source heat pumps
Air source heat pumps
Micro combined heat and power (micro-CHP) units
Wood-fuelled boilers, meaning boilers fuelled by wood, straw or similar plant matter

A statutory instrument (SI 2024/24) added four more items from 1 February 2024:

Water source heat pumps
Batteries for storing electricity, whether standalone or retrofitted
Smart diverters, which send surplus electricity from a microgeneration system to an appliance such as an immersion heater in the same building
Groundworks, or dredging of a body of water, needed to install pipework or other equipment for a ground or water source heat pump

The zero rate is a relief on installation

The zero rate covers the service of installing an ESM. That includes both the case where a contractor supplies and fits the material, and the case where a customer buys the material from a retailer and hires a contractor to fit it. Installation means fixing the material permanently in place, though for some items that is straightforward: loft insulation may only need unrolling and positioning.

A material supplied without installation is standard-rated at 20%. A retailer selling solar panels or a battery over the counter charges 20%, and a homeowner who fits the equipment themselves pays that 20% on the purchase. The zero rate reaches the purchase only when the person who supplies the material also installs it, or when a contractor installs material the customer has bought.

Work that is necessary to carry out the installation can be zero-rated as part of the same job. Cutting a new loft hatch to reach the loft for insulation, or fitting new radiators alongside a heat pump, falls within the relief where it forms part of a single supply of the installation.

Battery storage since February 2024

Before February 2024, battery storage qualified for the zero rate only when it was installed at the same time as another qualifying material, in practice solar panels. A standalone battery, or a battery retrofitted to an existing solar system, was standard-rated.

That changed on 1 February 2024, when SI 2024/24 added batteries to the ESM list in their own right. The zero rate now applies to a battery retrofitted to an existing installation and to a standalone battery that does not connect to any other ESM, provided in each case that it is installed rather than bought for self-fitting. The change followed a campaign by Solar Energy UK and parliamentarians to bring battery storage onto the list.

EV chargers, boilers and work that stays standard-rated

EV charge points are not on the ESM list, so their installation does not qualify for the zero rate. Some installers have quoted 0% VAT for EV charger work, but professional advisers reading VAT Notice 708/6 treat it as standard-rated.

The list also leaves out conventional boilers, central heating systems taken as a whole, building extensions and general refurbishment. Fitting a central heating system is standard-rated even though some of its components, such as controls, would qualify on their own.

Which buildings the relief applies to

The zero rate applies to installations in, or in the grounds of, residential accommodation. That covers houses, flats and other dwellings, and a range of communal residential settings: armed forces accommodation, children’s homes, care homes for the elderly or disabled, hospices, student accommodation, monasteries and similar communities, self-catering holiday accommodation, caravans used as a permanent home and houseboats adapted for permanent habitation. An institution qualifies where it is the sole residence of at least 90% of its residents. Hospitals, prisons, hotels and similar establishments are excluded.

From 1 February 2024 the relief was extended to buildings used solely for a relevant charitable purpose, meaning use by a charity for non-business activities, or as a village hall or similar facility for a local community. Charitable buildings had been within scope until Finance Act 2013 removed them, following a European Union ruling that the reduced rate for them was not permitted under EU law. The 2024 change restored the relief for these buildings.

Mixed projects and the single-supply test

Where an ESM is installed alongside other goods and services, the VAT treatment turns on whether the job is a single supply or several separate supplies. A single supply exists when one element is the main element and the rest are ancillary to it, and it carries one VAT rate across the whole job. HMRC points to indicators such as a single price, the work being advertised as a package, components not being available separately and everything being installed at the same time.

When an ESM is fitted as part of a larger project that is not itself an ESM, such as an extension that includes insulation, the whole supply can be standard-rated. The National Housing Federation has raised concerns with HMRC that the single-supply test is hard to apply to social housing, where ESM installation often forms part of a wider refurbishment programme, and HMRC’s position is that the outcome depends on the exact circumstances of each job.

Northern Ireland’s separate timeline

Northern Ireland reached the zero rate later than the rest of the UK because of the Northern Ireland Protocol and EU rules that continued to apply there. Until 1 May 2023 the 5% reduced rate applied in Northern Ireland, subject to the older social conditions or the 60% test described below.

The Windsor Framework cleared the way for the zero rate to extend to Northern Ireland, and a statutory instrument (SI 2023/376) applied it from 1 May 2023. Northern Ireland now has the same zero-rate treatment as Great Britain for the period to 31 March 2027. The Framework set up an EU-UK joint committee to review which goods can be charged at UK rates where they are consumed in Northern Ireland and cannot reasonably move into the EU, and ESM installations were the first goods granted that waiver.

What changes on 1 April 2027

The zero rate is time-limited. From 1 April 2027 the installation of energy-saving materials is set to move to the reduced rate of 5%, legislated in Group 2 of Schedule 7A to the Value Added Tax Act 1994. The measure was introduced as a five-year relief for 2022 to 2027, and no legislation currently extends it beyond that date. A future government could extend the zero rate or make it permanent, but no such decision has been announced.

The 5% reduced rate this replaced

Before 1 April 2022, ESM installations carried the 5% reduced rate rather than the zero rate, and even that was conditional. The reduced rate applied only where a social policy condition was met, for example the installation was in the sole or main residence of someone aged 60 or over, or in a care or nursing home. Failing that, the installation had to pass the 60% test: the cost of the materials had to be less than 60% of the combined value of the materials and the installation. This 5% reduced rate ran in Great Britain from 1 October 2019 to 31 March 2022. The move to the zero rate in 2022 removed both the social conditions and the 60% test.

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