Government pulled up on VAT measure

THE Government is being taken to court by Brussels for offering across-the-board tax cuts to encourage homeowners to make their houses more energy-efficient.

The European Commission claimed yesterday that, under EU rules, such VAT reductions must be linked to “social policy” and warned of this in a statement.

Under the EU’s VAT directive, member states can apply lower-rate VAT to “the supply of goods and services used in the housing sector, so long as this is part of a social policy”.

The statement announcing legal action in the European Court of Justice for breaching the rule explained: “Energy-saving materials could be covered by this provision if the conditions are met, i.e. if they are used for social policy purposes in the construction, renovation and alteration of housing.

However, there is no provision in the VAT Directive to allow a reduced VAT rate on “energy-saving materials” specifically, and the universal application of a reduced rate for energy-saving materials is therefore not allowed.

“By allowing a reduced VAT rate to all energy-saving materials, the UK is therefore going beyond the scope of what is permitted under EU law,” it said.