Press Release: Taxation: Commission takes the UK to Court over reduced VAT rate

The European Commission decided on 21 February 2013 to refer the United Kingdom to the EU Court of Justice for its reduced VAT rate on the supply and installation of energy-saving materials. This measure goes beyond what is allowed under the VAT Directive.

Under EU VAT rules, Member States may apply reduced VAT rates to the supply of goods and services used in the housing sector, so long this is part of a social policy. 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.

Member States themselves unanimously decided on the list of goods and services that could benefit from a reduced VAT rate, and they also insisted that this list be strictly applied, with no room for manoeuvre or interpretation. This is important to prevent competitive distortions in the Single Market and to ensure a fair and level playing field between all Member States.

The Commission is aware that the reduced VAT rate for energy saving materials has been linked to the UK's "Green Deal" to improve the energy efficiency of buildings. While it supports the objectives of the UK Green Deal, the Commission does not believe that breaking EU VAT rules will help in achieving these objectives.

Economic studies have shown that reduced VAT rates are often not the best way to achieve policy objectives or change consumer choices. In the case of promoting energy efficiency, there are a number of reasons why a reduced VAT rate is not the most efficient way deliver on this goal. For a start, it is difficult to define precisely these products, which can evolve and develop quite quickly, thereby creating uncertainty around the level of tax due. Moreover, a reduced rate does not target the population that needs it most, but instead is universally applied. In the case of energy efficient products, businesses are likely to represent a large proportion of those wishing to invest in them, in which case the VAT is deductible anyway. It is has been shown that frequently reduced rates are not fully passed on to consumers in the form of lower prices.

There are other, more efficient, ways of promoting energy efficient materials while remaining in line with EU law e.g. through direct subsidies. The referral to the EU Court of Justice is the last step in the infringement procedure.

http://europa.eu/rapid/press-release_IP-13-89_en.htm http://europa.eu/rapid/press-release_IP-13-89_en.htm

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