Chancellor cuts VAT on heat pumps and home insulation

Chancellor Rishi Sunak has pledged to end charging VAT for a range of energy saving building solutions such as heat pumps and insulation materials.  The commitments were made today in the latest Spring Statement delivered to parliament.  The VAT cuts are intended to help improve domestic energy efficiency and reduce heat bills across the country.

A decision to end businesses rates on a range of green technologies that can support the decarbonisation of buildings such as solar panels and battery systems was also announced in the statement.

The Chancellor added that further details on plans to tackle heat costs would be included in the government’s ‘energy security plan’ that was expected to be published in the coming weeks. This strategy will set out intentions and financial commitments for trying to provide “affordable energy” to customers with regards to nuclear and renewable power, as well as hydrocarbons, the government stated.

There was also recognition in the Spring Statement about the effectiveness of how the existing Apprenticeship Levy is being used by companies to fund training and upskilling of their workforces. The government said it would look at whether there were reforms to the existing system that would allow more effective and flexible training.

It stated, “This will include examining whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training.”

Political reaction

While some trade organisations representing lower carbon systems have welcomed the commitments in the Spring Statement, others have questioned the scale of support as UK homes face a significant increase in heating bills from April this year.

MP Rachel Reeves, the shadow chancellor, responded to the Spring Statement by arguing that the VAT cuts on building materials was “wholly inadequate” to address the number of fuel poor and inefficient homes across the country. The Labour Party this month claimed it would seek to insulate 19 million UK homes if in power to help curb the cost and environmental impacts of heating as part of its own energy security plans.

Initial industry response

From an industry side, the Heat Pump Association (HPA) said it was pleased the government had opted to abolish the five per cent VAT charge on energy efficiency measures such as heat pumps.

The trade group said it has been calling for further financial incentives to improve uptake of heat pumps for some time.  It added that the VAT announcement would complement the upcoming launch of the Boiler Upgrade Scheme that will offer grants of £5,000 to £6,000 to help cover the cost of acquiring and installing heat pumps in England and Wales.

However, the HPA argued that greater support would be needed to help improve the energy efficiency of lower incomes homes and ensure they are able to install heat pumps.

HPA Chair Phil Hurley said the Spring Statement was an encouraging development for heat pump providers, particularly with the VAT cut.

He said, “Whilst this decision alone will not be enough to enable all households to access technologies such as heat pumps, we are confident that it will play a role in helping to accelerate the switch to low carbon heat. But we must remember that more steps still need to be taken to support the rollout of heat pumps, including the removal of illogical environmental levies on electricity.”

The Federation of Master Builders (FMB) said it also welcomed the VAT cut on energy savings measures as a positive step for ensuring more UK homes are energy efficient.

FMB chief executive Brian Berry added that more ambitious commitments would now be needed to transform the 29 million existing UK homes that he said were too often leaky and energy inefficient.

Mr Berry added, “This VAT cut will help householders insulate their home at a time when energy bills are escalating. It will also provide a much-needed boost to local builders operating in the retrofit market. The government now needs to build on the VAT cut and implement a long term ‘National Retrofit Strategy’ to provide business certainty.”

The FMB said it was also encouraged by a commitment to review how best to encourage and fund more employers to train up staff and take on apprentices.  Mr Berry said training was a hugely important for the construction sector as it look to end a longstanding skills gap.

He said, “Smaller firms in the construction sector already conduct the bulk of the training, with 71 per cent of all construction apprentices being trained by them. Measures should focus on providing long-term solutions that incentivise more businesses to play their part in training the next generation of tradespeople. The FMB therefore welcome the chancellor’s commitment to enhance this system.”

Mike Foster, chief executive of the Energy and Utilities Alliance (EUA), argued that the chancellor had failed in his Spring Statement to effectively address the significant increase in heat and energy costs for millions of households that will come into effect from April.

He said, “His VAT cut on solar panels and heat pumps will be welcomed by those who make them and by those who can afford to fit them, but a VAT cut on energy bills would have helped everyone.”

“Frankly, consumers waiting to hear good news on their energy bills will be left asking, ‘is that it Chancellor?’”