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Green home VAT break ‘step in the right direction’ but costs are still too high – analysis

  • 23/03/2022
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Green home VAT break ‘step in the right direction’ but costs are still too high – analysis
The government’s announcement that it will nullify VAT on energy efficient materials down from five per cent has been welcomed by the mortgage industry, but there are fears it still will not help those with less disposable income.

Chancellor of the exchequer, Rishi Sunak, announced during today’s Spring Statement that the already reduced five per cent VAT on materials such as solar panels and heat pumps would be lowered to zero to encourage homeowners to make greener upgrades to their properties. 

Elise Coole, managing director of Keystone Property Finance, welcomed the announcement. She said: “While it is a step in the right direction, we believe the government could – and should – be doing much more to help people shoulder the immense financial burden associated with making their homes greener.” 

Ben Beadle, chief executive of the National Residential Landlords Association also commended the announcement, while Guy Gittins, CEO of Chestertons, called it a “major relief, particularly for buy-to-let landlords”. 

Scott Clay, distribution development manager at Together, said it was “promising” to see the chancellor push for more green investment and development to move the nation towards net zero targets. 

Chris Gardner, co-founder of Atelier, described the update as a “safety valve” both to the construction industry and homeowners looking to lower bills. 

He added: “The scrapping of VAT on vital, but still comparatively expensive, tech like solar panels and heat source pumps is a logical and popular response to the spike in energy prices that kicks in next week. But it will also offer long-term benefits to homeowners, the environment and UK energy policy.” 

Costs are still high 

Although the VAT scrap was received relatively positively, concerns over the remaining costs of installations have been raised. 

According to Energy Savings Trust, the average cost to install solar panels is £4,800. The VAT exemption would bring this down by £1,000 to £3,800 and result in an annual energy bill saving of £300. 

Clay said: “Even with average tax savings of £1,000 and over £300 on energy costs savings per year, the actual cost and installation of eco-materials is still very high and all too often severely under-budgeted for. Families and property investors alike will need to find this finance from elsewhere.” 

Richard Smith, partner at Sandstone Law, said some homeowners forked out as much as £10,000 on energy efficient installations reducing the five per cent tax saving to just £500. 

He added: “And you still need to have the £10,000 spare cash in the first place.” 

Howard Reuben, principal of HD Consultants, said aside from the costs of buying and fitting them, the strategy only worked on a financial basis over the long term due to low-rate rebate schemes such as the ‘feed in’ tariff. 

He noted that the former ‘feed in’ tariff which compensates homeowners for producing surplus energy at home was now replaced by the smart export guarantee (SEG) scheme. 

SEG pays a set rate for each kilowatt hour (kWh) of between 1.5p to 20p per kWh. Based on a rate of 3.99p per kWh, the Energy Saving Trust estimates a typical household based might only make between £75 and £110 per year under this scheme. 

Making use of more initiatives 

Coole said that if the government was serious about action it would need to provide more direct financial support. 

She suggested expanding the Boiler Upgrade Scheme to allow more people to access it. This scheme kicks in on 1 April and gives homeowners a grant of £5,000 off the cost and installation of an air source heat pump, £5,000 off the cost and installation of a biomass boiler, or £6,000 off the cost and installation of a ground source heat pump. 

It is however only available to homeowners in England and Wales. 

Coole added: “Ideally, this would be alongside the introduction of a replacement for the now defunct Green Homes Grant, which provided grants of up to £5,000 to those making energy saving improvements.  

“If given the time and proper funding, this scheme could have flourished and become a real game changer.” 

Outside of energy efficiency upgrades, Beadle said the chancellor should have reversed the decision to freeze housing benefit rates. 

“Without this, those relying on the benefit will find it increasingly difficult to afford their rents,” he added. 

Lack of PRS urgency 

Beadle said the government “failed to explain” what was required of the rental sector when it came to energy efficiency measures. 

He added: “The sector needs clarity as a matter of urgency.” 

Reuben also pointed this out, noting that regulations to improve the EPC ratings of rental homes by 2025 had still only been proposed and were not yet formalised. 

Without this, the VAT reduction would not be enough of an incentive for some. He said: “Until and unless the EPC changes are actually and ultimately written into legislation, many property owners – especially people who own older properties – are likely to hold off from solar panel and other EPC measures, for as long as possible.”

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