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Fact Check-Both the UK and EU are poised to introduce 0% VAT rates for solar panels and heat pumps

UK Chancellor Rishi Sunak claimed during his Mar. 23 Spring Statement that the UK can now introduce 0% VAT rates on items such as solar panels, heat pumps and insulation “thanks to Brexit” and because Britain is “no longer constrained by EU law”.

This is, for the most part, true as the UK can now set its own VAT rates across the board. However, in his speech (here Chancellor did not acknowledge that the European Union (EU) is also poised to introduce legislation that will allow Member States to set VAT rates for solar panels and heat pumps at zero (here).

Speaking in the Commons, Sunak told MPs: “If homeowners want to install energy saving materials, at the moment only some items qualify for a 5% VAT relief and there are complex rules about who is eligible. The relief used to be more generous but, from 2019, the European Court of Justice (ECJ) required us to restrict its eligibility.

“But thanks to Brexit, we’re no longer constrained by EU law. So, I can announce for the next five years, homeowners having materials like solar panels, heat pumps, or insulation installed will no longer pay 5% VAT – they will pay zero.”

While in the EU, the lowest rate the UK could reduce VAT to was – and currently still is for Member States – 5% (bit.ly/3Nl3TMW). However, only one or two products from a list of selected and defined items would have been eligible for this lower rate. Most products were – and still are – subject to a 15% baseline rate (bit.ly/3IVnPCu).

In 2015, the ECJ – the supreme court within the EU – ruled against the UK having the supply and installation of energy-saving materials on its list of items on the reduced 5% VAT rate (here).

But since leaving the bloc, Britain now has more room to manoeuvre when it comes to VAT, which is why the reduction on green home improvements is now able come into effect from Apr. 1, 2022

(here). Prior to the announcement, the country’s VAT rate for solar panels, heat pumps and insulation was 5% (here).

However, on Dec. 7, 2021, all 27 EU Member States agreed upon an updated VAT framework that would allow them to introduce 0% VAT rates on items such as solar panels and heat pumps (here and per Reuters report here). This was then approved by the European Parliament on Mar. 2, 2022 (bit.ly/3jt8vTD).

The change is yet to be formally introduced, but an EU official told Reuters via email that “the new rules are expected to be formally adopted by EU finance ministers soon”.

This VAT reduction has been under consideration in the EU for several years. It was discussed in an explanatory memorandum submitted on Jan. 18, 2018 (bit.ly/3JfMq59) while the UK was still part of the bloc. It was then formally proposed the following month (here). Therefore, had the UK remained in the bloc it would have had a say in ensuring this legislation passed.

Likewise, the EU official told Reuters that the bloc’s current VAT rules (prior to the 0% VAT rates) “were agreed unanimously by all Member States – including the UK at the time”. They added that the decision to introduce VAT exemptions was to bring the EU “into line with the modern world” and to help it “to fight against climate change”.

The official then said the bloc’s VAT rules “will of course also be available to Northern Ireland” under the terms of the Protocol on Ireland/Northern Ireland. This means Stormont will be able to introduce 0% VAT rates on solar panels and heat pumps, which highlights how the UK could have reduced rates to zero were it still in the EU.

There are also some exceptions to the bloc’s current rule for setting VAT at a 5% minimum.

For example, Member States could maintain a 0% VAT rate on a product if that had been set prior to Jan. 1, 1991 (bit.ly/35Keq3c).

Pedro Guertler, Programme Lead for Place Based Transitions at independent climate change think tank E3G (here), told Reuters via email that the Chancellor’s announcement was “by and large correct” in that the 0% VAT rate “could not have been done as a member of the EU” under what he described as existing “byzantine” European legislation.

He added: “0% VAT on solar will be permissible once the European Parliament votes in favour of what the Council wants. So far as I know, this won’t apply to as broad a range of things as the UK’s 0% rate.”

Mr Guertler said that the list of items to which 0% rates can be applied to is set to grow in the EU but that they will be subject to constraints “which the UK doesn’t face”. He added that Britain “wouldn’t have had as much room for manoeuvre” were it still a Member State, even with the upcoming change to VAT rules in the bloc.

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