VAT Cut to Zero on Insulation, Heat Pumps and Solar Panels for Five Years

Chancellor Rishi Sunak announced that VAT on the installation of energy efficient systems would be cut from 5% to zero from April in his Spring Statement. The cut to VAT for the next five years covers the installation of technologies such as solar panels, heat pumps and insulation.

In his address to the House of Commons Rishi Sunak said that a household installing a solar panel system on their homes would see over £1,000 in tax savings and savings on their energy bill of over £300 per year.

This measure is welcomed by the renewable energy industry at a time when many more households and businesses are considering alternative ways to power their homes. The energy price crisis, the Russian invasion of Ukraine and the effects on the global energy market have led to soaring utility bills. There have been many calls on the government to introduce ways to help households & businesses with the rising cost of energy.

Commercial and industrial solar also received a boost as changes to business rates relief for green technologies were brought forward by a year to support SMEs at this time of high-power prices. There will now be no business rates on a range of green technologies including solar panels and batteries from April 2022. Eligible heat networks will now also receive 100% relief. According to the government, these measures will collectively save businesses more than £200 million over the next 5 years.

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Despite several Conservative MPs writing to the Chancellor a week before his Spring Statement urging him to focus on the retrofit of UK homes, he fell short of announcing a wholescale and much demanded reduction of VAT on all refurbishment work. The cutting of VAT on refurbishment to 5% or below is one of three demands of the AJ Retrofirst campaign led by the Architects Journal which is calling for retrofit to be prioritised over demolition and rebuild.

Former Royal Institute of British Architects’ (RIBA) president and principal at Perkins & Will, Sunand Prasad said:

“With nearly 20 per cent of the UK’s emissions used to power Britain’s antiquated housing stock, there is no doubt we are reaching boiling point when it comes to creating energy-efficient homes. This battle to retrofit our homes is not only vital to combat the climate emergency. It will also help families across the country save on skyrocketing energy bills.

We strongly welcome the cut to VAT on energy-saving materials announced today and we urge the government to continue prioritising energy efficiency to level up the entire country towards a greener future.”

Many of the changes that key green groups have been calling for have not yet been addressed, in part due to further delays to the publication of the new energy security strategy.

Cara Jenkinson, Cities Manager at Ashden, sustainable energy and development charity commented:

“If the government really wants to build a stronger and more secure economy and tackle the cost-of-living crisis then then they must invest now in training thousands of people to roll out an urgent nationwide campaign of energy efficiency measures, such as retrofitting housing, and installing heat pumps. The cut to VAT on these measures is welcome, but not enough to drive the scale of change needed.”

The Chancellor said that the aim of the VAT cut is not only to help households improve energy efficiency and keep energy costs down but to support the UK’s long-term net zero ambitions.

There are many households that will be able to benefit from zero VAT on energy efficient measures. Currently, an average UK home can expect to pay between £4,000 to £8,000 for installing solar panels and between £8,000 and £14,000 for an air source heat pump system.

The Energy Saving Trust has previously estimated that it would take the average household between 9 and 17 years to recoup the cost of solar panels but with the energy cap increases this time period will fall as costs for using electricity from the National Grid continues to rise.

Unfortunately, no new skills policy has been introduced, only a promise to review the apprenticeship levy. A significant increase in the upskilling of the existing construction workforce and investment in colleges to train a new generation of builders and heat engineers, is required if the UK is to ramp-up the home energy retrofit to protect people from rising energy prices and create a greener Britain.

However, there is no doubt with the current global situation around energy prices this is a great time to invest in clean renewable energy that will, in the future, protect homes from the volatility of the energy market. The VAT on renewables was 5%, which was already low, but reducing that to zero will potentially help people to cut their energy bills and incentivise them to make energy efficient choices for their homes.

We are at the starting line in the race to create a green and clean future in the UK. Many more incentives will be needed to make this a reality.

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