Spring Statement - PwC comments on fuel duty cut and changes to VAT on energy saving materials

Commenting on the fuel duty cut and the changes to VAT rules on energy saving materials, Jayne Harrold, Indirect Environmental Tax Leader at PwC UK, says:

In the Spring Statement today, the Chancellor confirmed the widely expected fuel duty cut of 5p per litre on petrol and diesel which will apply from 6pm today for the next 12 months. This is only the second time that fuel duty has been cut in 20 years and is the biggest cut ever.

The cut will cost the Government £5bn and save the average car driver £100, the average van driver £200, and the average haulier £1,500 over the next year. In real terms, the cost of filling an average family car will go down by £3.50 at 6pm tonight. With fuel prices at their highest ever levels this will help to reduce the impact on both households and businesses.  

While cutting fuel duty may seem to contradict the Government’s Net Zero ambition by reducing the cost of carbon intensive fuel, the artificial price signal propping up the price of fuel is less necessary when market prices are so high.  Consumers and businesses are already incentivised to reduce their consumption through high prices at this point.

The proposed changes to the VAT rules that apply to domestic installation of energy saving materials will also improve the affordability of measures for households if the Chancellor gets the changes right, although the cost will still be prohibitive for many.  The recently announced loans to help households install energy efficiency measures and the expansion to £1bn per year for 2022-2026 of the Energy Company Obligation, which requires energy suppliers to improve the energy efficiency of low income homes, are further measures the Chancellor has taken to try to address affordability.

The current rules are complex, restrictive, and limit the times when the reduced rate of VAT can apply. Under current rules, the fact that energy saving materials are frequently installed at the same time as wider heating measures, such as full central heating systems, prevents the reduced rate from being applied at all, meaning they are subject to 20% VAT.  

If the Chancellor gets the changes right not only will he reduce the rate of VAT from 5% to 0% and extend the types of materials that qualify, but he’ll deal with the complex red tape that prevents the reduced rate from being applied in circumstances where wider works are being carried out together.  

For example, a central heating system may consist of a boiler, radiators, copper pipe, radiator valves, heating controls, insulation and so on. If supplied on their own, the radiator valves, heating controls and insulation would qualify for the reduced rate, but they are normally installed as part of a single supply of a central heating system and therefore subject to the standard rate of VAT. 

The existing threshold around the cost that materials form of the overall job of installing the energy saving materials also prevents the reduced rate from applying to the equipment in many cases. For example, with the installation of costly items like solar panels, the materials themselves often exceed 60% of the overall cost of the job.  This means that the materials, the solar panels, are subject to the standard rate of VAT and only the installation service can be subject to the reduced rate of VAT.  Removing this threshold would allow the cost of capital intensive items like heat pumps or solar panels to be reduced by allowing the reduced rate of VAT to apply.

What is really needed to give best effect to the incentive is the ability to carve out the energy saving works and apply the reduced rate to those works.  This will properly incentivise the adoption of energy saving measures, help the drive to decarbonise domestic heating, and allow consumers to save on their energy bills.