Spring Statement 2022: Indirect tax changes target energy saving works and fuel duty

Although there was one high profile VAT announcement made by the Chancellor, many will be disappointed that another was omitted.

Energy saving works to be zero-rated

The Chancellor has announced that the VAT rate for the installation of energy saving materials will be reduced to zero for the next five years. This may also bring more work to replace defective cladding within the zero rate.

This tax cut will apply to the services of installing the relevant items and the materials themselves. The change has been described as a “Brexit change”, as previously EU VAT law would have prevented the UK from applying a 0% VAT rate, although there are planned developments to EU VAT law to make changes to reduced rates of VAT more widely available.

The items covered include those currently subject to the 5% rate of VAT, such as the installation of solar panels, insulation and thermostatic radiator valves in homes owned by housing associations or those in receipt of benefits. It will also apply to those materials and services that were previously subject to 5% VAT, but which were increased to 20% from October 2019 due to incompatibility with EU law. This extends the relief to the installation of these energy saving materials into other homes, and wind and water turbines.

The change will take effect from 1 April 2022 and is due to last for five years. Currently the provisions only apply in Great Britain but a matching adjustment to funding will be made to the Northern Ireland Executive.

Assuming the VAT saving is passed on, this is great news for housing associations, other residential landlords and individual homeowners seeking to improve the thermal efficiency of their homes. With the desire to achieve net zero and the urgent need to help tenants struggling with rising energy bills, many landlords have brought forward their retrofit programmes. This VAT cut should encourage more to do the same.

This announcement may also provide an opportunity to simplify the VAT treatment of replacement cladding for those whose cladding has been found defective following the Grenfell tragedy. While these works could be zero-rated in certain limited circumstances, going forward, we would hope that this will apply in the majority of cases. The primary purpose of installing cladding to a building is normally for thermal insulation, and where this is the case there should now be clarity that these works are zero-rated.

No extension to the reduced rate of VAT for hospitality, leisure and tourism

The temporary reduced VAT rate of 12.5% applicable to certain sales in the hospitality, leisure and tourism sectors will come to an end on 31 March 2022 as previously planned. The Chancellor did not respond to calls to extend the relief further.

Impacted businesses will need to have systems and processes in place to make the change in VAT rate overnight between Thursday 31 March 2022 and Friday 1 April 2022.

Fuel duty

In a widely anticipated move, a 12 month reduction to fuel duty of 5p per litre and a freeze on the 2022-23 increase takes effect from 18:00 on Wednesday 23 March 2022. The Chancellor commented that this would be around a £5 billion saving and will be welcomed by motorists, assuming, importantly, that it is passed on in full by petrol retailers, although sadly the saving may also be absorbed by further pump price increases in the near future.

Despite expectations to the contrary, motorists may not see a price cut at the forecourt at 18:00 tonight, as the fuel currently stocked at filling stations has already been taxed at the pre-Budget rate. Price changes can be expected for deliveries made to forecourts in the coming days.

It is also interesting that the inflationary increases in the price of petrol over the last 12 months means that the increase in VAT revenues over that period (VAT being calculated on the duty inclusive sales price) is typically higher than the duty reductions being made; meaning that the Chancellor continues to collect more tax on each litre of petrol sold that at the start of 2021. So, in reality, was this reduction a missed opportunity to really give help to businesses and consumers in managing the impact of rising living costs?

For more information or to discuss any of the points highlighted in this article, please contact your usual contact partner.