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EC takes UK to court over reduced VAT on energy-saving materials

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The European Commission is to refer the UK to the Court of Justice of the European Union for its reduced VAT rate on the supply and installation of energy-saving materials, on the grounds that the measure ‘goes beyond what is allowed under the VAT Directive’.

‘Member states may apply reduced VAT rates to the supply of goods and services used in the housing sector, so long this is part of a social policy. Energy saving materials could be covered by this provision if the conditions are met i.e. if they are used for social policy purposes in the construction, renovation and alteration of housing,’ the EC said in a press release.

‘However, there is no provision in the VAT Directive to allow a reduced VAT rate on "energy-saving materials" specifically, and the universal application of a reduced rate for energy saving materials is therefore not allowed. By allowing a reduced VAT rate to all energy saving materials, the UK is therefore going beyond the scope of what is permitted under EU law.’

The EC said that while it is aware that the reduced rate has been linked to the UK's Green Deal to improve the energy efficiency of buildings, it does not believe that ‘breaking EU VAT rules’ will help in achieving the Green Deal’s objectives.

It added: ‘Businesses are likely to represent a large proportion of those wishing to invest in [energy efficient products], in which case the VAT is deductible [in the VAT return] anyway. It is has been shown that frequently reduced rates are not fully passed on to consumers in the form of lower prices.’