ANNEX TO REPORT
Reducing VAT on energy saving materials (The Association for
the Conservation of Energy)
1. Background
1.1 From 1996 onwards MPs and NGOs have campaigned
for VAT on energy saving materials to be reduced to 5%. But HM
Customs and Excise have consistently advised that this is contrary
to EU law.
1.2 The current Government has been sympathetic,
and indeed two VAT reductions to 5% have been introduced on some
energy saving materials in certain limited circumstances. However,
Ministers have repeatedly stressed that they are constrained by
EU law as regards extending the VAT reduction. Now an EU Court
case has come to light which suggests that an across the board
reduction on all purchases of energy saving materials would fall
within the discretion allowed by EU law. This case dates from
1988, and it actually involved the UK. So officials must have
known about it. In other words, it seems that they have been knowingly
giving Ministers incorrect advice for many years.
2. EU Law
2.1 Under the 6th VAT Directive, Annex
H a reduced rate of VAT is only allowed 'as part of a social policy'.
The key to what is permitted is thus the meaning of the words
'social policy.' Ministers have used these words to justify the
current limited VAT reductions, as helping to deal with fuel poverty
and creating employment. But it has been consistently argued (on
the basis of advice from officials) that an across the board reduction
(especially to cover D-I-Y) would be unlawful under EU law.
3. The EU Court Case: EC Commission v United Kingdom
(Case 416/85)
3.1 The case involved The Commission taking the
UK to Court, claiming that the Government had contravened the
provisions of the Sixth VAT Directive by permitting VAT reductions
for a number of products and services. As noted above, the Directive
states that VAT reductions may be granted for clearly defined
social reasons.
3.2 The matter in dispute that is relevant here
concerned the zero rating of the sale of houses. The Commission
argued that this was unlawful as it was not in furtherance of
a 'social policy'. The UK argued that it was — that the
social policy was home ownership for all.
3.3 The Court decided that:
_ "The identification of social reasons
is in principle a matter of political choice for the member states
and can be the subject-matter of supervision at the Community
level only in so far as, by distorting that concept, it leads
to measures which because of their effects and their true objectives
lie outside its scope." Judgement of the European Court of
Justice para 14. and
_ "With regard to buildings intended for
housing, the Commission's arguments cannot be upheld. The measures
adopted by the United Kingdom in order to implement its social
policy in housing matters, that is to say facilitating home ownership
for the whole population, fall within the purview of 'social reasons."
Judgement of the European Court of Justice para 36.
In other words, it is for each country to decide
what are its 'social reasons' and the European Court can only
intervene if they have done so in such a way that 'distorts the
concept' or that has other 'true objectives'. And in the case
of the reduced rate for the sale of all housing "facilitating
home ownership for the whole population, falls within the purview
of 'social reasons'."
4. The effects of this on energy saving materials
4.1 If 'facilitating home ownership for the whole
population' is a legal 'social reason' enabling a reduced VAT
rate to be applied, then it must follow that 'facilitating a warm
home for the whole population' is also a legal 'social reason'
enabling a reduced VAT rate to be applied — and so
the 5% reduced rate can be applied to all sales and installation
of all energy saving materials in all circumstances.
Association for the Conservation of Energy
January 2003
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