UK alone in tax penalties on energy saving

The UK is alone among the eleven northern EC countries in having a higher rate of VAT on energy-saving materials than on domestic energy use, a parliamentary answer has revealed. Treasury Ministers insist there are obstacles in EC law to ending the anomaly - but they took the opposite tack in Opposition.

The preference given to energy consumption over energy saving is a long-standing distortion of the UK's tax system. Energy-saving goods are charged at the standard rate of 17.5%. The previous Government's attempt to correct the anomaly was aborted in response to public protests, and one of Labour's first acts in power was to cut VAT on domestic fuel and power from 8% to 5%.

This distortion is absent from all ten other northern EC states, according to statistics given in a parliamentary answer by the Financial Secretary to the Treasury, Dawn Primarolo.1The answer reveals that the UK has the lowest rate of VAT on domestic energy, even compared with the reduced rates allowed in four Member States on some energy sources. The lowest standard rate is 12%, while six countries have rates of 20% or more. Denmark and Sweden have the highest rate, 25%, with no exemptions.

The level of VAT charged on domestic renovation or alteration is generally identical to that charged for energy use in most countries. Some have a limited relief for social housing which encompasses energy-saving materials.

Ms Primarolo's reply points with apparent pride to the fact that the UK is alone in having a reduced VAT rate - 5% - for energy-saving materials expressly for public programmes, such as the Home Energy Efficiency Scheme, to alleviate fuel poverty in low-income households. The move, announced in the pre-Budget statement in November, will be introduced in the Budget on 17 March. It will provide a modest £7.5 million per year, allowing an extra 40,000 homes to receive grant-aid (ENDS Report 274, pp 3-5 ).

But the wider question is whether there is any real obstacle in EC law to removal of the anomaly. The Government insists that the sixth VAT Directive allows VAT on energy-saving materials to be cut only in applying housing policy as part of wider social policy, and then only if the measure is targetted at the poor.

But the Association for the Conservation of Energy, which wants a level playing-field between energy use and energy saving, insists that this obstacle - if it exists - is more apparent than real.

Belgium, for instance, notified the European Commission in 1995 that it intended to cut the standard 21% rate of VAT to 6% for energy-saving materials as part of a wider housing policy. The Commission made no objection, apparently because it considered the move small beer. The UK benefitted from the same approach when VAT on domestic energy was cut from 8% to 5% last year.

The Government's critics see no reason why it should not do the same on energy saving. Indeed, Ms Primarolo herself was adamant when in Opposition that this was precisely what the UK should do.

In March 1996, when an amendment to the Finance Bill to allow VAT relief on energy-saving materials was lost by a single vote in the House of Commons, Ms Primarolo was clear. "We do not believe that the proposals would be ruled out by the sixth [VAT] Directive," she said, "but we are prepared...to put it to the test" (ENDS Report 254, pp 32-33 ).

Critics are dismayed by the Government's subsequent change of tune. They are also concerned that it appears to be doing nothing to honour the Chancellor's promise in November "to explore with our European partners the possibility for a reduced rate of VAT for a wider range of energy-saving materials." No such discussions had in fact been initiated by early February, Ms Primarolo revealed in a parliamentary reply.

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