Sunak axes VAT on retrofits but offers no new relief on bills

Rishi Sunak has axed VAT on energy saving retrofits but been criticised for taking no new steps to mitigate soaring household energy bills in his Spring statement.

The headline energy announcement in the chancellor of the exchequer’s spring tax and spending statement, issued on Wednesday (23 March), was a reduction in the rate of VAT on energy-saving materials from five per cent to nought.

The move applies to all energy saving materials, which are currently subject to the five per cent rate, and extends the relief to wind and water turbines. The zero per cent relief will apply for five years from next month and permanently removes eligibility conditions introduced in 2019. It reverses a ruling by EU’s Court of Justice, which the Treasury said “unnecessarily restricted” the application of the relief on energy saving materials such as heat pumps, solar panels and insulation.

However, the statement contained no fresh measures to help with energy bills despite widespread warnings that the recent spike in wholesale gas prices could see another big rise this autumn in the level of the price cap, pushing millions more households into fuel poverty.

The statement pointed to the chancellor’s £9.1 billion package of support for energy customers, which Sunak announced in early February before the Russian invasion, and stated that the best remedy for protecting households is economic growth and tax cuts, including the £3,000 rise in the threshold for paying national insurance.

The statement also brought forward to this April, one year earlier than previously planned, the introduction of targeted business rates exemptions for plant and machinery used in onsite renewable energy generation and storage, together with 100% relief for low-carbon heat networks.

And the statement confirmed that the government is planning to publish an energy security strategy, including boosts for fossil fuels, nuclear and renewables.

The statement received a mixed response from industry experts.

Simon Virley, vice chair and head of energy and natural resources at KPMG, said: “It may feel like summer, but there remains a winter chill ahead for most households on energy bills.

“While the chancellor did cut fuel duty to help motorists, increase the Households Support Grant for the most vulnerable households, and extend VAT relief for energy saving materials, he decided against increasing the broader support package already provided for all households with rising energy bills this spring.

“But with the energy price cap potentially rising to around £3000 a year this autumn, the government will almost certainly have to further extend the support being provided to struggling households and businesses before next winter to help them cope with the biggest rise in the cost of living in a generation.”

Jess Ralston, analyst at the Energy and Climate Intelligence Unit, said: “Removing VAT on energy efficiency products such as insulation is an immediate boost for families facing soaring gas bills. But there are lots more tools within the chancellor’s grasp for getting off Russian gas and reducing household bills.”