As part of its net zero objectives and legislative changes following the UK’s departure from the EU, the UK Government recently cut VAT from five percent to zero, on energy-saving infrastructure and materials. The zero rating, which will remain in effect until April 2027, applies to a range of items including solar panels, heat pumps and roof insulation as well as wind and water turbines for domestic properties and relevant residential buildings such as care homes.
This measure comes in the wake of COP26 where the UK was one of the 190 nations committing to moving away from fossil fuels and towards more green energy sources. It comes at a time where many households are struggling with rising energy costs and struggling to pay their bills. Meanwhile, the impact of inflation, Brexit and wider cost-of-living pressures are also impacting on many Scottish businesses.
The key question is whether hard-pressed consumers and businesses will actually invest in energy saving measures on the back of these becoming VAT-free, especially in a challenging economic environment where finances are being squeezed. There are, however, other support options to be considered that can help make it viable for both individuals and businesses to make the green energy transition and benefit from a current zero VAT rating.
For households there are interest-free loans of up to £17,500 available when installing home renewables through the Home Energy Scotland loan. This scheme includes up to 40% cashback for some eligible energy efficiency measures and 75% for certain renewable heating systems.
There is also support available for small businesses which are keen to transition to greener forms of energy despite facing a tough economic climate. Through the Energy Saving Trust SME loan scheme, small companies can access up to £100K to help them pay for energy and carbon-saving upgrades across their business. The initiative, which has so far provided Scottish businesses with over £26m in loans, also offers cashback grants of up to £20K to further support sustainability investment.
The SME loan is available to Scottish businesses that fall within the EU definition of small and medium-sized enterprise, as well as not-for-profit organisations, and charities. It can be used to finance the installation of energy efficient systems, equipment or building fabric, including heating, ventilation, and air conditioning upgrades. It also covers 75% of eligible costs up to a maximum of £10,000 on renewable heat technologies such as solar panels, wind turbines, biomass boilers and air source heat pumps, all of which are now zero-rated for VAT.
Along with the SME loan scheme, there are other forms of support to help businesses in making the green transition. In addition to sign-posting businesses towards other forms of funding, Business Energy Scotland also provides advice to help companies save energy, money and carbon.
While welcomed, the zero VAT rating on renewable energy measures will not in itself start a revolution. Alongside this combination of support measures, the post-COP26 focus on sustainability, and rising energy costs it does however help make it easier for businesses and consumers to invest in green energy.
Grant Mackay, VAT specialist at accountants Chiene + Tait