We have to increase VAT on energy saving materials

Yesterday I was told that VAT on energy saving materials is not going up in the budget. I found that surprising, as I believed the consultation document HMRC (part of the Treasury)  put out on 9 December 2015contained different information. It stated clearly

“In line with the CJEU’s judgement, the government intends to amend the relevant legislation in the Finance Bill 2016.” “The purpose of this consultation is to receive comments as to whether or not the proposed legislation achieves its objective…”

The Consultation document made clear that the lower 5% rate of VAT on solar panels, water turbines and wind turbines would be replaced with a 20% rate. It also showed that in certain cases installations will in future only attract the lower rate on all energy saving materials if they are to “people living in dwellings who have a social need (qualifying persons) “etc  Other installations in residential dwellings will depend on the cost of installation relative to the energy saving materials. The Treasury estimated this as being a £65 m tax hike in a full year.

The truth is the UK lost its case in the European Court last summer. The European Commission took the UK to court, demanding that we raise VAT on energy saving materials in various cases. The Court decided clearly in favour of the Commission.  The Court said

“the United Kingdom of GB and NI has failed to fulfil its obligations under Article 98 of the VAT Directive , read in conjunction with Annex III thereto”.

In view of the fact that VAT is an EU tax, all the time the UK is in the EU it has to comply with EU law. The ECJ decides this, not the UK, and has recently decided the UK has to raise VAT on energy saving materials. The HMRC consultation is quite clear about what has to be done. It is not a consultation on whether we should do it or not, just a technical consultation on whether their latest proposals will ensure the UK complies. So why are some now  told the Finance Bill will not contain a VAT rise on energy saving materials?

The government seems to think it will get some new flexibility over VAT. This would require a new VAT policy from the Commission and changes to EU law. In the meantime the UK has  broken the current EU law and has been ordered by the European Court to change our law instead. When is this legal tangle going to be sorted out? Is the EU really going to change its law In the way we want? If so, how and when? Are we going to be fined for non compliance? Will we see the new draft law before the referendum?