The Value Added Tax (Reduced Rate) (Energy-Saving Materials) Order 2019

Jesse Norman Excerpts

Monday 24th June 2019 General Committees

[The Financial Secretary to the Treasury (Jesse Norman)]

I beg to move,

That the Committee has considered the Value Added Tax (Reduced Rate) (Energy-Saving Materials) Order 2019.

It is a great pleasure to serve under your chairmanship, Mr Robertson. The instrument amends the Value Added Tax Act 1994 to alter the scope of the reduced rate of VAT for the installation of energy-saving materials. That ensures consistency with the 2015 judgment of the Court of Justice of the European Union.

As the Committee will know, this Government are deeply committed to greening our economy and our society and bid fair to be the greenest Government ever. It is of huge regret to us that we have felt compelled to make this change because of EU regulation.

Under current UK VAT rules, a reduced rate of 5% applies to the installation of energy-saving materials such as insulation, solar panels and other technologies in residential properties. Under EU law, it is not possible to remove VAT from those materials, so the reduced rate of 5% applies. The VAT relief aims to lower the cost for consumers and families to install those energy-efficient products in their homes.

In 2011, the European Commission launched an infraction proceeding against the UK, arguing that the scope of the UK’s reduced rate for the installation of energy-saving materials was too wide and needed to be changed. The Government did not agree with the European Commission’s infraction proceeding, so the matter was heard by the Court of Justice of the European Union. In 2015, the Court agreed with the Commission and found that the scope of the UK’s reduced rate for energy-saving materials was indeed too wide.

Under EU rules, the UK is obliged to comply with the decision of the EU Court of Justice. If it does not, the European Commission will be required to issue infraction fines against the UK.

[John Spellar (Warley) (Lab)]

Given that the Prime Minister and others, including the Conservative leadership candidates, say that we are going to leave the EU on 31 October, why is the Minister rushing to comply rather than ignoring this and waiting until then?

[Jesse Norman]

As the right hon. Gentleman will know, it is hardly rushing to respond to an infraction proceeding that began in 2011 and involved a European Union Court of Justice appeal in 2015. While we remain a member of the EU, we are required to obey its laws. When we leave the EU, we will of course be in a position to revisit the issue.

[John Spellar]

I understand the build-up—it always takes this long—but given that Britain may leave the EU in only a few months, why does the Minister feel it necessary to do this now?

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[Jesse Norman]

There is a natural pace of change to these things. The negotiations have taken place over the last three years, and the Government felt that, all things considered, it was appropriate not to delay further but to continue with the process of seeking to comply. We could be placed under infraction proceedings if we delayed on this matter, so it is important not to be delayed. As I have said, it will be perfectly possible and not difficult for a future Government to reverse the change by statutory instrument, in the usual way, after we leave the EU.

Under EU rules, the UK is obliged to comply with the decision of the EU Court of Justice. If it does not, the European Commission will be required to issue infraction fines against the UK. The Government have taken appropriate time to ensure that as much as possible of the existing VAT relief is maintained. The problem would have been faced by any Government committed to green energy, but we have managed to set up mitigations that others might not have done.

In 2015, a consultation on potential changes was published, which included proposals to remove entirely the VAT relief from the installation of solar panels. That could have affected 40,000 installations per year, and would have had a significant impact on those wishing to invest in sustainable energy solutions. Following a 2016 consultation on that proposed change, the Government recognised the concerns of industry, of colleagues across the House and of campaigners, and decided to go back to the European Commission to agree, if possible, scaled-back changes.

Since 2015, Treasury officials have held several sets of discussions with the European Commission. Following those discussions, the Government agreed with the Commission to maintain much of the reduced rate of VAT for solar panels, meaning that the changes will now affect far fewer installations. That is a highly successful negotiation outcome. We have done the right thing by complying with international obligations while maintaining as much of the VAT relief as possible for UK households.

The proposed amendments will maintain the reduced rate on all installations of energy-saving materials for recipients who are aged 60 or over or on certain benefits, for relevant housing associations, and where the installations are in buildings used for relevant residential purposes, such as care homes and children’s homes. The proposed changes will remove the reduced rate for the installation of wind and water turbines, which are not deemed to be improvements to residential accommodation, and maintain the reduced rate for all other installations of energy-saving materials in residential accommodation where the cost of the materials does not exceed 60% of the total cost of the installation. That is a significant improvement on the 50% originally consulted on in 2016. The proposed changes are expected to take effect from 1 October 2019.

Her Majesty’s Revenue and Customs put the changes to public consultation in April 2019. I am grateful for the responses provided by industry groups and other interested stakeholders. Although it was reasonable for industry groups to wish for the relief to be maintained in full, there was some acknowledgement that the Government are required to make the changes under EU law.

I understand that there will be concern from industry about the loss due to EU law enforcement of a VAT relief for energy-efficient products at a time when we are encouraging use of those products through other schemes. That is why our agreement with the Commission to implement changes that affect relatively few installations is important. HMRC does not expect the changes to have a significant impact on the industry. Around 1,500 future installations of solar panels, energy-saving boilers and wind turbines, plus some other smaller-scale items, are expected to be affected annually. That represents less than 5% of the value of all installations currently eligible for the reduced rate. Overall, the changes are expected to have a negligible impact on Exchequer revenue.

Overall, the Government continue to support investment in energy-saving technology. Her Majesty’s Treasury and HMRC will continue to work with the Department for Business, Energy and Industrial Strategy at official and ministerial level to manage the impact of the changes.

These changes are the result of a highly regrettable EU process of infraction and legal proceedings. They are necessary for the UK to maintain compliance with its international obligations. Speaking personally, I wish the previous arrangements had continued, as I am sure do many members of the Committee, but I am pleased that these changes have been agreed. They are designed to have the minimum possible impact so the Government can continue to support families with installing energy-efficient products in their homes. I commend the order to the Committee.

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[Jesse Norman]

I thank all colleagues who have spoken in the debate. Let me start in reverse order, with the issues raised by my right hon. Friend the Member for Newbury. He is absolutely right to highlight the extent to which this country has been in the vanguard of legislation and change to combat climate change and to improve our energy efficiency, often ahead of the EU—he is right to focus on that and I identify to a degree with his experiences. He is also right to suggest that it is quite wrong to imply that somehow our officials or lawyers are soft on these matters. When we send legal teams in to negotiate or fight battles, that is done at the highest level in the European Court of Justice and with the gloves off, as one might expect from any high-quality legal adviser or barrister. The same is true of policy officials. We have a rule-of-law society, possibly more developed than anywhere else in the EU. That is why, as a general matter, we take it upon ourselves to be compliant with EU law and in good time.

My right hon. Friend raised two interesting ideas. One was a grant scheme on the model of the churches scheme that he described; the other was whether batteries should somehow be accommodated by HMRC to create a new battery industry. Both are interesting ideas; they are tangential to the scope of this debate but I am happy to take them away and write to him with proper advice about whether we could do something in both areas. We will need to, and want to, comply with relevant EU law, but within that there would be some scope for discussion and I would be happy to take that up with him.

The hon. Member for Aberdeen North raised a series of more technical questions. First, I will ask my officials to make sure that the link to the tax information impact notes has been corrected. She asked about the impact on industry; if she has specific impacts in mind, she is welcome to write to me about her constituency or Scotland more generally and I will be happy to discuss that. In this case, the Government consulted twice: once on the policy and once on the statutory instrument. I assure the hon. Lady that officials meet the industry regularly and have shared aspects of the negotiation as they have gone forward, to bring that consent with them.

The hon. Lady closed by asking about the logic of the 60% figure, which is an improvement on the original EU suggestion. As I think she understands well, having read the explanatory memorandum and researched the matter, EU VAT law allows the reduced rate to apply to all installation costs except where the cost of the goods is significant. The question is: what does “significant” mean? The original suggestion was 50%; in negotiation, that was pushed up to 60%. That was a better outcome than was anticipated—certainly a better outcome than was anticipated by the other side. Our judgment has been that it strikes the right balance—certainly the right negotiable balance—between the twin concerns of complying with EU law and minimising any adverse impact on UK businesses.

It is important to note—certainly, the comments of the hon. Member for Bootle show that it is easy to forget—that we are talking about a very small change in terms of impact. Some 95% of installations are projected to be unaffected by this change, and its overall effect on the Exchequer is negligible—less than £5 million. As we have spent £30 billion supporting renewable energy over the last few years, one can see the magnitude of the contrast.

I come now to the comments of the hon. Member for Bootle. This is our first debate together, and I hope future debates are not characterised by the approach that he has taken today. There was a lot of bombast and windbaggery in his remarks, and I do not think it dignified him or the debate. Let me pick up some of his points. First, he tried to suggest there was great conflict in the position into which we have been forced not merely by EU regulation, but by a prolonged process of litigation and negotiation.

The hon. Gentleman contrasted our position with other aspects of Government policy over the past few years. Let me remind him that this is the only Government to announce that the country is exiting the coal industry entirely. There is the Renewable Transport Fuel Obligation Order 2007, the Energy Act 2013 and the “Road to Zero” transport strategy—a vast array of measures have been taken to comply with our international obligations and electrify the economy.

Wind power, particularly offshore wind—an area with which I was closely associated when I was a Minister at BEIS—has been a conspicuous success story precisely because we have taken the kind of energetic international action that characterised the forward position we have taken as a country, to which my right hon. Friend the Member for Newbury referred. Before the hon. Member for Bootle accuses the Government, he needs to tell us whether he would accept the EU Court judgment if he were part of a Labour Government, or whether he would propose allowing the situation to drag on and endure significant infraction costs.

[Peter Dowd]

The premise of my argument is quite simply that we are in this position because the Government failed to do proper negotiations and discussions. That is the whole of it. The Minister is now asking me to close the door after the horse has bolted, but it is his horse and his door.

[Jesse Norman]

I am absolutely not proposing that. Members will recall that the original infraction case has dragged on for many years. It is a problem that any Government would have faced. The hon. Gentleman is not prepared to say whether a Labour Government would accept the EU judgment or incur the infraction costs, which illustrates the hollowness and bombast of his position. We are in this position despite a very prolonged process of litigation and negotiation, and it is fatuous to suggest that he would somehow work more closely with the EU than the Government have done to agree proposals. He was not in the Court when the judgment was made, and he was not present at the negotiations. He has absolutely no reason to second-guess the intelligence, wisdom, advice or good intentions of the officials and legal advisers who were involved. We must treat what he says as essentially evidence free.

The hon. Gentleman refers to paragraph 37 of the European Court judgment. From what he read out, it appears to concern zero rates of VAT, which does not bear on the matter at all. This issue has been taken to the highest level in the EU judicial framework: the European Court of Justice itself. A better outcome has been negotiated than was originally sought. The order will have a negligible impact because 95% of installations will not be affected. I therefore commend it to the Committee.

Question put.