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

Lord Spellar 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?

--- Later in debate ---

[Richard Benyon (Newbury) (Con)]

I have some sympathy with the Minister. As a Minister in 2010, I inherited a situation where the Government were being taken to the European Court and were going to be subject to substantial multimillion pound fines on an occasion when the British Government intended to have a stronger environmental ambition than the rest of the European Union. That continued to happen relentlessly throughout my three and a half years as a Minister, attending international forums where we were promoting ideas and ambitions that were greener and more environmentally friendly than those of the rest of our European partners.

I remember a conversation during the EU co-ordination meeting at a congress of the parties in Hyderabad, in which an appalling person from the European Union—a Brit, actually—threatened the British Government that if we continued to hold out for our high ambitions, which I think were on biodiversity targets, we would go against the principles of the Lisbon treaty and we would be subject to a fine. I have never had my pro-European tendencies tested more than when I was representing Britain in international forums and had to spend hours sitting in European co-ordination meetings, only to hear such a thing.

The Opposition spokesman, the hon. Member for Bootle, can have a bit of fun on these occasions, but because he is a sensible person he knows that if he were in Government he would not want to put the Government in the position of having to pay a huge infraction fine. My friend, the right hon. Member for Warley, knows too that the timetable of such things is not in the Government’s gift. Very quickly we could find ourselves in a position, regardless of where we are in terms of our exit from the European Union, where we are at risk.

It is not something that any of us feels comfortable with. I and other Members are working hard on a proposal to the Government that may be of some assistance in trying to find a way forward, both while we are members of the European Union and soon after we have left.

[John Spellar]

May I help the right hon. Gentleman with his difficulty? The reason the European Commission behaves like that towards the British is because the British civil service rolls over to it. Were our civil service prepared to be as robust as the French are in response, there could be a much more realistic relationship. One could not imagine French Ministers in a similar position introducing a measure in this way, with this timescale.

[Richard Benyon]

I respect the way in which the right hon. Gentleman presents that argument, but I think he knows that that is a fallacy. Such things are frequently said, but I assure him that my civil servants were as robust as they could be, and I and my fellow Ministers were as robust as we could be. However, we came up against the legal bulwark of the Lisbon treaty, and there was nothing that we could do.

I wish to probe a couple of points. Some years ago, a similar situation arose regarding VAT on repairs to churches. The Government produced something called the listed places of worship grant scheme to offset that. Could the Minister suggest a grant scheme to offset the cost as part of a future Budget? If we leave the European Union at the end of October, it would be good to have some idea of the Government’s ambitions post exit.

Secondly, under current HMRC guidelines, battery installs can attract the reduced 5% rate only if they are installed at the same time as new solar, unlike all the other technologies defined as energy saving by HMRC, which can be installed separately. However, the proposed HMRC change means that any combined solar and storage system is likely to be over the 60% material/install threshold and, therefore, will attract the full 20% VAT rate. I would like to ask the Minister about the option for HMRC to allow stand-alone battery installs to attract the 5% rate, opening up the battery retrofit market to around 1 million homes that already have solar.

The justification for defining batteries as energy-saving materials is that domestic PV customers in the UK typically self-consume just a quarter of energy generated, because solar generation tends to be in the daytime, whereas UK home power demands tend to be at night. The rest will be spilled on to the grid. If a customer buys a battery, their self-consumption proportion typically would increase to around 70%—a huge efficiency improvement to the overall system for the customer, with the added benefit of reduced energy bills. Would the Minister consider that as a way forward?