Spring Statement  

Sunak cuts 5% VAT on green homes to zero

Sunak cuts 5% VAT on green homes to zero
Photographer: Ari Lindquist/Bloomberg

Chancellor Rishi Sunak has scrapped the 5 per cent VAT on green home improvements such as heat pumps and solar panels.

In his Spring Statement published today (March 23), Sunak said the government will reverse a ruling by the Court of Justice of the European Union which he said has previously restricted the application of VAT relief on the installation of Environmental and Social Management Systems (ESMs).

A “time-limited” zero rate for the installation of ESMs will be introduced in its place, taking effect from April 2022.

The government said a typical family having rooftop solar panels installed will save “more than £1,000” in total on installation, and then “£300 annually” on their energy bills. 

Northern Ireland will not feel these changes immediately, so its government will receive a share of the value of this relief until it can be introduced UK-wide.

Richard Smith, a partner at Sandstone Law, said the change was a "wink at trying to boost green energy in homes".

But he added: "Bear in mind that it is already a reduced VAT rate of 5 per cent for those installations, so it’s a 5 per cent drop. 

"The chancellor’s claim that families who have solar panels installed could see tax savings worth £1,000 is a bit steep given that the average cost is less than £10,000 so the 5 per cent reduction is at most worth £500, and you still need to have the £10,000 spare cash in the first place."

Timothy Douglas, Propertymark’s head of policy and campaigns, said with rising energy costs as well as looming energy efficiency targets for the property sector, financial incentives are well needed. 

The Office for Budget Responsibility's economic outlook today suggested if wholesale energy prices remain as high, energy bills could rise another 40 per cent in October. This would see pushing inflation edge to a 40-year high of 8.7 per cent in the fourth quarter of 2022.

Douglas said: “We will be scrutinising the details of this scheme as they are released to ensure they have the maximum impact for all homeowners, including investors in the private rented sector and that landlords and letting agents can take full advantage of the change.”

Jason Mountford, a financial planning expert at Irwin Mitchell, reckons the chancellor’s removal of VAT for energy efficiency is unlikely to impact the hardest hit by the energy crisis.

“Sunak announced that this would save homeowners £1,000 on average, however given that the average cost to install home solar panels is £4,800, it is another measure that is unlikely to impact the hardest hit by the energy crisis,” he said.

ruby.hinchliffe@ft.com