VAT on retrofit work will be cut to 0% from April for certain energy-saving home improvements such as heat pumps, insulation and solar panels.
Chancellor Rishi Sunak’s announcement in the Spring Statement follows years of industry pressure on the government to lower VAT on retrofit, which campaigners say will help to incentivise homeowners to make energy-efficient home improvements.
Retrofitting a home helps to improve its energy efficiency through new technology or features; a process which differs from renovating a house or making home improvements designed to make a home more aesthetic.
The built environment accounts for roughly 40% of UK greenhouse gas emissions, with 20% of this coming from the 29 million homes in the UK, and cutting tax on retrofit is seen as a way not just of encouraging homeowners to make their homes more energy efficient, but transforming the built environment.
The announcement was met warmly by industry groups, although some suggested that Mr Sunak should have gone further and announced a national retrofit strategy that would fund energy efficiency upgrades of the UK's housing stock.
The VAT cut will last for five years - here’s everything we know about it.
VAT on Retrofit Cut Follows Intense Campaigning
Industry bodies and select committees including the Environmental Audit Committee (EAC) have long called on the government to cut VAT on retrofit, the current rate of which is 20%, with a reduced rate of 5% available for qualifying energy-saving products.
Ahead of the Spring Statement, campaigners ramped up the pressure on the government, with MPs, think-tanks and trade bodies all writing to the chancellor this month to argue that improving energy is the fastest way to cut household energy bills amid soaring energy price rises.
The UK has some of the draughtiest homes in Europe, with more than 19 million homes given an Energy Performance Certificate rating of band D or below. And ahead of the Spring Statement the UK Green Building Council said: “As we face pressures on multiple fronts, the importance and value of sustainability in the built environment has never been clearer.”
Following the announcement, Brian Berry, chief executive of the Federation of Master Builders (FMB) said: “With 29 million homes in the UK, of which many are leaky and energy inefficient, decarbonising our existing housing stock represents an important piece of the net zero puzzle.
“Historically, consumers have not been properly incentivised to commission green upgrades to their homes. This VAT cut will help householders insulate their home at a time when energy bills are escalating. It will also provide a much-needed boost to local builders operating in the retrofit market.”
Which Energy-Saving Measures Will Apply?
The Northern Ireland Protocol prevents the Treasury from applying the VAT cut in Northern Ireland, but Mr Sunak said he will discuss changes with Northern Ireland “as a matter of urgency”.
The government website currently lists the following measures which have been eligible for the 5% reduced VAT rate:
- Air source heat pumps
- Ground source heat pumps
- Insulation on walls, floors, ceilings and lofts
- Solar panels
- Heating controls
- Draught stripping, for example insulation fixed around windows and doors to reduce draughts
- Micro combined heat and power units
- Wood-fuelled boilers
How Much Can Retrofit Measures Save Homeowners?
Mr Sunak said that because of the new VAT cut, families that install solar panels will now be able to save £1,000 worth of taxes a year and more than £300 will be taken off their energy bills.
Meanwhile, the Energy and Climate Intelligence Unit thinktank calculated earlier this month that installing new insulation has saved UK householders nearly £1.2bn a year over 10 years.
But There’s Still no National Retrofit Strategy
The government has so far resisted pressure to adopt a national retrofit strategy, and the Spring Statement was another missed opportunity for this to be announced.
“The government now needs to build on the VAT cut and implement a long term National Retrofit Strategy to provide business certainty,” added Berry.
James Morley, business development director at Cornerstone Tax, added that while he welcomed the VAT cut, more needs to be done to help with retrofitting homes.
“The 0% VAT cut is a welcome step for homeowners looking to make green renovations, but more help is still needed from the government to aid homeowners looking to make green property renovations.
“It seems that homeowners all over the country are seriously considering turning to green renovations to combat the rising costs caused by the energy crisis. By making your home energy efficient, homeowners will save money in the long run and contribute to the UK's sustainability targets also.”
The government is launching the Boiler Upgrade Scheme on 1 April, which will offer grants of £5,000 for homeowners to have air source heat pumps installed, and £6,000 for ground source heat pumps.
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Jack has worked in journalism for 11 years and is the News Editor for Homebuilding & Renovating, a role he has had since 2019. He strives to break the most relevant and beneficial stories for self builders, extenders and renovators, including the latest news on the construction materials shortage and hydrogen heating. In 2021 he appeared on BBC's The World at One to discuss the government's planning reforms.
He enjoys testing new tools and gadgets, and having bought his first home in 2013, he has renovated every room and recently finished a garden renovation.