VAT on net zero

A common sense approach to VAT needs to prevail in order to hit government’s exacting green targets, writes Mark Henderson, Chief Executive of Home Group 

Ever since tax aficionado, Maurice Lauré, introduced the French to VAT in 1954 he has created a division among economists – a division that made its way on to our shores when VAT was introduced in the 1970s.

It’s a fiscal feud that looks likely to run on as long as that of the Montagues and Capulets.

In the one camp you have the anti-VAT gang, who view it as a double tax because consumers pay for goods and services from already taxed income. In the other, the VAT advocates, who see it as a progressive tax where people who spend the most pay the most VAT.

But, in whichever camp you reside, there’s one salient feature that’s hard to argue against - VAT’s multi-layered and flexible nature. It has proved useful time and again.

And, the latest example can be found in the net zero debate, where government is using VAT’s ability to flex in-order-to support their green targets.

It makes sense and we’re fully behind this approach, which will give them and us a significant boost in helping to achieve net zero by 2050.

Yes, in an ideal world we’d like green products to be zero-rated. This would turbo charge investment, green jobs and growth. But, given the economic situation post Covid, we at Home Group are realistic and recognise that a 5% rate of VAT is probably as good as it gets for now.

However, it isn’t quite that simple. There’s a grey area. Through HMRC regulations, certain energy saving measures can be delivered at 5% VAT. But, if they are delivered alongside ‘other works’ there is a very high risk they’ll be charged at 20%.

Currently, it’s the contractor who decides what VAT rate to apply based on HMRC’s guidance – and in our experience, contractors usually take a cautious approach and charge 20% VAT on the whole project.

The easiest example to give is that if you fit solar panels and carry out limited repairs to the roof, this VAT would be charged at 5%. If you were to replace the roof and add Solar PV, the whole project would likely be charged at 20%. It’s not seen as a ‘green project’ but ‘other works’.

This means for housing associations to maximise their investment proposition, which, considering the scale of the net zero challenge is imperative, they would have to sacrifice operational pragmatism and inflict a higher level of disruption on customers.

In other words, the housing association would have to replace the roof then go back at a later date to fit the Solar PV. This would cause customers unnecessary disruption, as well as making the housing association look incompetent due to working on the roof twice in a relatively short space of time. And, on top of that, it’s still commercially ineffective as you lose any benefit of having scaffolding and other infrastructure in place to do the works.

Just put yourselves in the position of one of our customers. Rather than get the job done with the minimum amount of disruption, thanks to the taxman we need to disrupt them twice.

Simply taking the 15% differential isn’t an option for us. After all that, the association would still be massively out of pocket having had to cough up the extra VAT. However positive, everyone knows that net zero cannot be reached without significant investment in our existing housing stock. 

To illuminate the point, and to add scale, let’s take a typical large housing association with a 40,000 to 50,000+ portfolio.

Ballpark costs of necessary improvements are, let’s say, around £1.2bn. Government funding (based on previous examples) towards that – again ballpark – will be around £128m.

Due to the guidance around the 20% VAT on ‘other works’, and contractors’ cautious natures, the housing association would hand over £223m to HM Revenue and Customs. The result being they’d be out of pocket, against the funding allocation, to the tune of £95m.

In order to meet the exacting net zero targets, the common sense approach would be to set the VAT rate for full retrofitting at 5%, meaning that housing association would pay £55m in VAT, saving it £168m.

That £168m would go a long way. It could be used to supply and fit 25,000 heat pumps in peoples’ homes, or fund 230 apprentices every year for the next 28 years, and so on.

Such a reduction might seem like a stretch for the Treasury. But, applying different VAT rates to ‘green’ schemes and the ‘other works’ would mean a fairer tax system and deliver in a targeted way on Chancellor Rishi Sunak’s promise to cut taxes and encourage investment.

Also, given the stated agenda to ‘level up’, it would be a great way to help voters not just in the Red Wall but right across the UK.

Home Group, alongside fellow partners in the Greener Futures Partnership, together with colleagues in the sector, is putting this argument to government as it’s a one that delivers for all.

Government and housing associations dramatically improve their chances of reaching the ambitious 2050 net zero targets, while customers enjoy the benefits of energy efficient homes and significant savings, while having gone through the least disruptive process.

Although it’s not as universal as Maurice Lauré had first introduced, the evolved multi-tiered nature of VAT has proven beneficial time and again. Let’s use it again for the major challenge we face.