What the Latest Reforms For VAT Relief on ESMs Means for the UK

One of those moments came just recently, when the government elected to roll out further reforms to their Spring Statement 2022 – specifically, the VAT relief applied to certain energy-saving materials, or ESMs – which would be applied to their new Autumn Budget for 2023. These new reforms were to be advised by a Call for Evidence from the general public and industry experts who wish to see the renewable energy sector given more scope for boosting the UK’s green capacity and emancipating it from fossil fuels. 

The latest changes have been long anticipated – but with a combination of excitement and anxiety for the road that lies ahead. This is a critical moment in the UK’s journey toward renewable self-sufficiency, and the bulk of the work lies in the government’s hands to enhance cost-efficiency and make ESMs more feasible for businesses and homes across the country. 

The latest changes will impact homeowners. While commercial solar is a key technology for boosting the UK’s capacity, it’s vital that domestic installations prove financially tenable for billpayers.

The Background: What the Spring Statement Offered the Renewable Energy Sector

In 2022, the government made public their intentions to bring about a reduction of 15% to the UK’s overall energy consumption by the turn of the decade. Part of their plan was to expand temporary VAT relief on a number of energy-saving materials in order to make the technologies more widely available to UK homes. 

It was a positive step forward, although not without its critics. The scheme was caveated by a ‘single supply’ rule, which meant that houses undergoing significant refurbishment through one contractor with a single contract price would miss out on VAT relief. These issues were summarised clearly by the Chartered Institute of Taxation.

There was another significant criticism levelled against the project – that it was far too limiting, and that only a small number of a much wider pool of ESMs were eligible for VAT relief. 

By the spring of 2023, however, the government was ready to receive suggestions via their Call for Evidence and asked for suggestions to be submitted – along with evidence of their eligibility for VAT relief as technologies whose primary purpose was to reduce carbon emissions – ahead of the Autumn Statement.  

What are the Autumn Statement Reforms? 

There have been a number of reforms and additions made to the plan set forth in the Spring Statement earlier this year, which are clarified in this summary. One of the key purposes of the Call for Evidence made at the Spring Statement’s release was to identify areas where the government could expand relief to additional energy-saving technologies. This would prove crucial to making the country more energy-efficient and avoiding countless tonnes of CO2 being released into the atmosphere going forward. 

The government know this, but for a long time, their willingness to embrace renewable energy technologies like wind and solar has been tenuous. The Conservative Party has consistently reaffirmed their distaste for solar, with both Liz Truss and Rishi Sunak making statements that suggested a very conscious rejection of the idea of expanding solar production through solar farms and large-scale commercial solar installations. They have also pursued plans to build additional nuclear power sites, despite the fact that nuclear energy represents a poor and undesirable substitute for truly renewable energies. 

Thankfully, the existing relief has been expanded to cover more ESMs – including vital batteries for storing excess solar, wind, and water energy produced throughout the day. Both retrofitted and standalone batteries proved highly compelling in the Call for Evidence, with a combined response rate of 123. 

Now, as a result of this call, the government is rolling out VAT relief to any electrical battery storage unit (standalone or retrofitted).

Why are Battery Installations so Important for Renewable Energy? 

Renewable energy sources like wind or solar are freely available – an infinite resource that is made available to us at no additional cost. The only cost associated with wind or solar is the cost of installing and maintaining the right technology to harness it – for instance, solar panels. 

But despite the fact that these resources are never going to deplete, there are times when producing energy is harder – or impossible. The obvious ‘downside’ to solar energy is that the sun isn’t always shining. Particularly poor weather will produce a lot less energy than bright sunshine and clear skies, and the night-time makes energy generation impossible. 

The solution? Battery storage. Throughout the day, a good solar PV installation built to fit the scale and demands of the site it’s powering will produce more than enough energy to keep that same property powered throughout those ‘downtime’ hours when the sun isn’t around. Without a battery installation, solar panels feed energy straight into the property and any excess is sent straight into the grid; with a battery, the owner of the panels can choose how much to save and how much to send into the grid. 

A fair few years back, solar panels were nowhere near as practical as they are now. Prior to the introduction of lithium-ion batteries, home and business owners were very limited in terms of how much they could rely on their solar installations. A certain amount of dependence on the national grid remained, particularly if their energy consumption was relatively high at night. 

These days, it’s a lot easier to emancipate yourself from the grid, but lithium-ion technology is not the cheapest option. Without VAT relief, the scope for properties to be made renewable was severely limited.

What Are the ‘Other Technologies’

At Atlantic Renewables, our priority naturally lies with the availability and cost-efficiency of solar PV installations, but we keep a close eye on the industry as a whole to see that the UK’s targets for carbon neutrality and green recovery are still feasible. Solar energy represents a key – and, to some researchers, the leading – technology for revolutionising the UK’s energy sector, but it will always be complemented by other technologies that reinforce the country’s ability to sever reliance on the international fossil fuel market. 

Among the other technologies suggested by the Call for Evidence were water-source heat pumps, which were approved for VAT relief, in part thanks to their ability to complement the Boiler Upgrade Scheme already available to property owners across the UK. Diverters (for diverting renewable power to a specific electrical appliance, like an immersion heater) also proved popular among respondents and, again, were confirmed as appropriate for VAT thanks to their ability to boost the efficiency of other ESMs already covered by the scheme. 

Smaller-scale options that feature some capacity for saving energy (though don’t make it a priority) included low voltage lighting, EV charging ports, and insulation protection. Unfortunately, while useful for reducing energy bills and carbon emissions, these options did not meet the government’s three criteria for submissions:

  • Improving energy efficiency and reducing carbon emissions
  • Cost effectiveness
  • Alignment with broader VAT principles

Thermal storage, too, was rejected. The government stated that, while it was worth significant consideration, the broadness of the term means that some products would qualify, and others would not. 

Who Benefits from VAT Relief on Battery Installations? 

At the moment, VAT relief on all qualifying ESMs is limited to domestic settings and buildings used solely for charitable purposes. Originally, the latter was excluded from the scheme as a result of EU law, but Brexit enabled the government to pass the Windsor Framework and allow charitable buildings to qualify once more for ESMs.

This marks a great step forward after almost a decade of exclusion for charitable premises.

Of course, commercial premises not dedicated to a charitable purpose are still excluded from this VAT relief, but the decision to extend relief across a longer list of ESMs means that contractors will be able to reduce their prices significantly – and pass those savings onto homeowners looking to reduce their carbon footprints. 

Exiting the European Union has also meant that the UK could expand relief across wind and water turbines and offer the relief to all homeowners, rather than those who met certain social conditions, or for whom the installation costs represented more than 60% of the overall cost. 

These restrictions were weighing down an otherwise beneficial and promising scheme, and we look forward to seeing the results of this scheme, and how it further incentivises green renovations in homes and charities across the country. 

If you want to find out more about retrofitting a lithium-ion battery for your solar installation – or fitting a solar PV system – on your property, then get in touch with the team at Atlantic Renewables for a free quote. 

Atlantic Renewables

Atlantic Renewables are a solar PV design and installation company, providing affordable solutions in Manchester, Cheshire and throughout the North West.