Archived press release

Treasury flip-flops on energy vat change

10 March 1998

Whitehall sources have confirmed that the Treasury is backing down on Gordon Brown's promise to cut VAT on energy saving materials, Friends of the Earth revealed today. The news comes as Parliament's Environmental Audit Committee publishes its first report,which is likely to call for the VAT change as a priority measure in the Budget. The Treasury is claiming that EC VAT rules prevent the change, a claim dismissed by FOE as “utterly bogus”.

VAT at the standard rate was imposed on energy saving materials (like insulation and heating controls) in 1989. Debating the Conservative Government's 1996 Budget, Treasury front-bencher Dawn Primarolo (now Financial Secretary) supported an amendment to reduce the rate of VAT on energy saving materials to 8% “in the name of justice, jobs,democracy and energy efficiency”.

In the 1997 Budget VAT on domestic fuel was cut to 5%, but energy saving materials continue to be taxed at 17.5%. The Government is still refusing to implement the cut it supported in Opposition, which would cost only about £40,000,000 a year. Britain has one of the worst records on winter deaths in the developed world, more than twice as high a rate as the USA, Denmark and West Germany, and higher even than former Communist countries such as Bulgaria. Most of the 30,000 to 60,000 extra deaths each winter are believed to be related to cold weather illnesses including flu, pneumonia and hypothermia.The elderly are particularly likely to be affected, partly because many cannot afford to heat their homes properly or install effective insulation.

However, the Chancellor announced a limited concession in his 1998 pre-Budget statement. Although insulation materials generally would continue to attract VAT at the higher rate, he said that “VAT on the installation of energy saving materials under existing grant schemes, such as the Home Energy Efficiency Scheme, will be cut from 17.5% to 5%in the Spring Budget of 1998". This announcement received the biggest cheer of the day from Labour back-benchers.

But the Treasury is now believed to be backing away even from this watered down commitment. Exceptions now being considered to the VAT cut include large parts of the Government's own Home Energy Efficiency Scheme. Under this scheme, pensioners can

get a quarter of the cost of insulation measures in their homes paid for by Government grant. The Treasury is planning to continue to charge VAT on spending under this scheme at the standard rate. Low income families, however, may get a VAT reduction. How this convoluted scheme will be policed has not been explained. Schemes run by local authorities and by the Government-backed Energy Saving Trust may also be excluded from the VAT cut. At least sixteen local councils have already written to the Treasury protesting at this plan.

The Treasury claims that the EU Sixth Directive may prevent a general VAT cut on energy saving materials. But in Opposition, Dawn Primarolo said: “we disagree ... that the proposals would be ruled out by the Sixth Directive, but we are prepared to put it to the test”. In 1995 Belgium reduced its VAT rate on energy saving materials from 22% to 6%without protest from the Commission.

A general VAT reduction on energy saving materials could lead to a 10% in sales,according to industry estimates. It would increase jobs in insulation, cut energy consumption, and cut greenhouse gas emissions.

Commenting, FOE Executive Director Charles Secrett said:

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Published by Friends of the Earth Trust