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

Peter Dowd Excerpts

Monday 24th June 2019 General Committees

[Peter Dowd (Bootle) (Lab)]

It is a pleasure to see you in the Chair, Mr Robertson. I think this is the new Financial Secretary’s first outing, certainly in Committee, so I welcome him to the role. However, I do not welcome his comments, which were a “not me, guv” statement. “Nothing to do with me, nothing to do with this Government; it’s all about the EU. Let’s blame them.” That is what his statement was about.

On the day we got a climate change denying letter from Lord Lawson, we also have this order before us. The Solar Trade Association, which is deeply concerned, wrote to us, saying that MPs’ actions must match our rhetoric. Today, we have had lots of rhetoric but no actions. I will touch on that a little more. I will also touch on the European Court of Justice judgment, which I know everyone in the room will have read—no doubt several times, to get the nuances of it.

As the Minister laid out, the order narrows the scope of the UK’s reduced rate of VAT for installations of energy-saving materials in residential accommodation, with effect from 1 October. Under the new rules, the reduced VAT rate will no longer apply to wind or water turbines. Perhaps the logic is that they are not energy saving but energy producing, so they will not be eligible for this VAT reduction. That is a rather bizarre, almost Orwellian approach, which flabbergasted me.

Just months after the Labour party secured a parliamentary declaration of a climate emergency, introducing high taxes on energy efficiency and low carbon solutions for our homes while retaining a 5% rate on fossil fuels simply does not make sense. To add to the absurdity, a motion to approve a statutory instrument relating to the draft Climate Change Act 2008 (2050 Target Amendment) Order 2019 is being debated on the Floor of the House—if not today, perhaps in the next few days. How on earth can the energy-saving materials instrument fit in with that commitment? How can we understand it as anything other than favouring fossil fuels over renewable technologies?

Despite the rhetoric, which the Solar Trade Association mentioned, and grandstanding, the instrument makes it clear that, not only do the Government not take the climate crisis seriously, but they continue to support fossil fuels via the tax system. It is okay if they do that and also support renewables, but to do one without the other is a bit odd. Indeed, clauses 36 and 37 and schedule 14 of the Finance Act 2019, which we opposed, create a favourable tax mechanism to allow companies buying equity in UK oil and gas fields to acquire the tax histories of the selling companies. I say that only to juxtapose it with the Government’s position today. It is probably to be expected, given that some Cabinet Ministers have denied the scientific consensus on climate change, and several of the Tory leadership contenders have close links with organisations and individuals who promote climate change denial. I refer, for example, to Lord Lawson and his letter today, which, if anybody has bothered to read it, is bizarre.

Meanwhile, figures released in April show that the UK is set to miss its own carbon targets by an ever wider margin. Can the Minister clarify the Government’s position and explain how the order fits in with the fact that they are so widely off track in meeting their own targets?

We are told that the instrument is required because of an ECJ decision made in 2015. Colleagues will remember that, following the 2016 Budget debates, the Labour party forced a Government U-turn on their proposals to implement the decision, so why is it being introduced now—a point my right hon. Friend the Member for Warley made? The timing is particularly unfortunate and incongruous because the view in Europe on VAT has evolved considerably since the 2015 ruling. The European Commission continues to consider its action plan on VAT and has proposed,

“regular review(s) of the list of goods and services eligible for reduced rates”,

and/or abolishing the list altogether. Did the Government bother to ask them about that? I suspect not in the negotiations that the Minister referred to. While the consultation continues, it would surely be unwise for the UK to pre-empt it.

My right hon. Friend also made the point that if we are to be out of the European Union by 31 October—apparently—why not kick the can down the road a little bit further? We have been kicking it down the road for about three years, so another few months will not make much difference. Taking far-reaching action now, only for changes to have to be made shortly, could risk imposing costs on businesses and individuals. A better approach is for the UK to work closely with the Commission to determine what minimal changes ought to be planned for, while still allowing action to tackle the climate emergency. That is the sensible way forward. That is what the Government should do instead of navel gazing with Tory party leadership elections while the country and our climate go to the wall.

A written ministerial statement refers to the meeting of the Economic and Financial Affairs Council, held in Luxembourg on 14 June 2019, discussing,

“a strategic long-term vision for a climate-neutral economy.”—[Official Report, 13 June 2019; Vol. 661, c. 37WS.]

Given both the current ambiguity as a result of ongoing legislative reform in Europe, as well as the UK’s planned imminent departure from the EU, it does not seem appropriate for the UK to use the 2015 ECJ judgment in this way.

Furthermore, the ECJ judgment says only that the UK could not apply reduced rates in a blanket way,

“irrespective of the social context in which such operations take place”.

That suggests that, had the Government redesigned the scheme so that it took social context into account, they would not necessarily have had to scrap lower-rate VAT on energy-saving materials. Will the Minister tell us whether the option of adapting the Government’s scheme to take into account social interest—as opposed to scrapping the subsidy entirely for the installation of wind and water turbines—was considered? We are not convinced that the SI is the only option for the future.

Despite the statement in the explanatory memorandum— that there

“is no, or no significant, impact on businesses, charities or voluntary bodies”—

many stakeholders argue that the final price paid by customers for measures that save energy and reduce emissions could be significantly increased. That might discourage the uptake of solutions that are key to making our homes energy efficient and low carbon in order to meet our climate change targets.

Rules based on the proportion of installation cost versus capital cost could disproportionately disadvantage people in less prosperous areas of the country where installation costs tend to be lower. This measure might also hit heat pumps and combined solar and storage systems, as the cost of the materials is likely to exceed the 60% limit. Will the Minister respond to those concerns, and will he clarify the process with regard to the impact assessment—the process that resulted in that stated conclusion?

Alternatively, Labour is committed to protecting and safeguarding investment in renewable energy and green infrastructure to help insulate homes. Recently, we announced plans to reduce energy bills by installing solar panels on nearly 2 million homes. Indeed, the shadow Secretary of State for BEIS, my hon. Friend the Member for Salford and Eccles (Rebecca Long Bailey), recently challenged the Government on their climate change actions in Prime Minister’s questions, after they scrapped the subsidies for domestic solar panels in April. The Government have form on this—a big long list of all previous convictions and antecedents, as people used to say.

Climate change is clearly an existential threat. We owe it to ourselves, our communities and future generations to protect and safeguard the world in which we live. Labour takes those responsibilities seriously, so we cannot support the order.

I will now touch on how the Government did not do a good enough job in the negotiations or with the information they submitted to the Commission and to the Court. I could go through that in detail, but, as an example, I will refer to paragraph 37 of the judgment. This is important, because it goes to the heart of the Government’s slapdash approach—

[The Chair]

Order. Will the hon. Gentleman speak up? I want to hear what the judgment says.

[Peter Dowd]

You are about the only one in the room who does, Mr Robertson. I am pleased about that and thankful for it.

Paragraph 37 sums matters up:

“However, the documents in the file submitted to the Court, without more, make it impossible for the Court to consider that argument, relied on for the first time by the United Kingdom in its rejoinder, to have been made out and to hold that the ‘zero-rate system’ remained, in accordance with Article 110 of the VAT Directive, actually applicable to such operations and covered such operations in their entirety. That argument consequently is not sufficient ground to call into question the Commission’s complaint that the national legislation at issue, with regard to the application of reduced rates of VAT on the conditions laid down in Article 98 of the VAT Directive, read together with Category 10a of Annex III thereto, does not limit its scope to operations of renovation and repair of private dwellings.”

I and other people read that to mean that the Government could have presented more documents, better evidence and a better case because the Commission was open to it. I repeat:

“However, the documents in the file submitted to the Court, without more”—

without more documents, it does not say more details—

“make it impossible for the Court to consider that argument”.

The information and the will from the Government to make the case were lacking. They failed, and they should take responsibility for their failure and stop blaming the European Union, the Commission and the European Court of Justice. It is like in any case: they lost in court. They did not have somebody protecting, proselytising, and prosecuting their case, and they lost. They are responsible for the fact that this order is before us today. They should take responsibility and ’fess up to their failures.

--- Later in debate ---

[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.