Energy-saving materials and heating equipment (VAT Notice 708/6)
How to account for VAT if you’re a contractor or subcontractor installing energy-saving materials and grant-funded heating equipment.
1. Overview
1.1 This notice
This notice explains when the installation of energy-saving materials and heating equipment is zero-rated or reduced-rated. Where reference to the term ‘relief’ is made that will relate to supplies made at the zero rate of VAT in Section 2 and at the reduced rate of VAT (5%) in section 3.
Following various legislative changes from 1 October 2019, this notice covers supplies of installations of energy-saving materials made between 1 May 2023 and 31 March 2027. From 1 April 2027 onwards, supplies of installations of energy-saving materials will revert to the reduced rate of VAT of 5%. From 1 February 2024, further changes were made to the relief, currently applied the zero rate of VAT, which is covered in section 2 of this notice.
There have been no changes to the VAT treatment of supplies of grant-funded installations of heating equipment, currently applied at the reduced rate of VAT (5%) which is covered in section 3 of this notice.
Information on the liability of other building work is explained in Buildings and construction (VAT Notice 708) and reliefs from VAT for disabled and older people (Notice 701/7).
Further information about the VAT treatment of energy-saving materials prior to 1 May 2023 can be found in the previous version of this notice available from the National Archives.
1.2 Who should read this notice
You should read this notice if you’re a contractor or subcontractor installing:
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energy-saving materials
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grant-funded heating equipment
1.3 The law
Section 30 of the VAT Act 1994, provides that goods and services specified in schedule 8 to the Act are zero-rated.
Group 23 of schedule 8 specifies when installations of energy-saving materials are zero-rated.
Group 3 of Schedule 7A specifies when grant-funded installations of heating equipment are reduced-rated.
You can find more information about current rates of VAT.
2. Installations of energy-saving materials
2.1 Zero-rated installations
A zero rate applies to the installation of certain specified energy-saving materials from 1 May 2023 to 31 March 2027.
A zero rate applies to the groundworks necessary for the installation of ground and water source heat pumps (read section 2.5) in, or in the curtilage of, residential accommodation and charitable buildings (read sections 2.21 and 2.22) from 1 May 2023 to 31 March 2027.
From 1 April 2027 onwards these will revert to the reduced rate of VAT of 5%.
2.2 Reduced-rated installations
From 1 October 2019 until 31 March 2022, the reduced rate of 5% applied to the installation of energy-saving materials in, or in the curtilage of, residential accommodation in Great Britain (England, Scotland and Wales).
From 1 October 2019 until 30 April 2023, the reduced rate applied to the installation of energy-saving materials in, or in the curtilage of, residential accommodation in Northern Ireland.
During these periods the reduced rate was subject to one of the social policy conditions being satisfied or the 60% threshold not being exceeded.
Further information about the VAT treatment of energy-saving materials prior to 1 May 2023 can be found in the previous version of this notice available from the National Archives.
2.3 Scope of the relief
The relief applies to the services of installing energy-saving materials in residential accommodation and charitable buildings. For example, where a customer employs a business to install energy-saving materials that the customer purchased directly from a retailer.
The relief also applies to the supply of energy-saving materials by the person who installs those materials in residential accommodation and charitable buildings. For example, where a customer employs a business to supply and install energy-saving materials.
However, if you supply energy-saving materials without installing them your supply will be standard-rated. For example, the sale of energy-saving materials by a retailer is always standard-rated.
2.4 Installation
Installation, in this context, means putting in place energy-saving materials.
This involves some process by which materials are permanently fixed in place, although loft insulation may simply need to be unrolled and positioned in place to be installed.
2.5 Energy-saving materials installed with other works
2.5.1 Single supplies
It is common for other goods and services to be provided at the same time as the installation of energy-saving materials.
When energy-saving materials are installed at the same time as other goods and services, you must determine whether they constitute a single supply (which is subject to just one VAT rate) or multiple supplies (which may potentially be subject to different rates of VAT).
A single supply is where one element of the supply is the principal element to which all other elements are ancillary. An ancillary element does not constitute, for the customer, an aim in itself, but is a better means of enjoying the principal supply.
Indicators of a single supply include:
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a single price
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the supply is advertised as a package
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the components are not available separately
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the installation of all the components are carried out at the same time, such that, the customer perceives that what they are getting is a single supply
The following examples are not exhaustive and may not apply if the contractual position between you and your customer is different to the examples or if there are other supplies or activities taking place at the same time.
Example 1
If you install loft insulation in residential accommodation and have to cut a new loft hatch in the ceiling to make good access to the loft, the cutting of the loft hatch falls to be ancillary to the supply of insulation.
This is because the supply of cutting the loft hatch has been carried out solely to support the principal supply of installing the loft insulation, and not as an aim in itself.
This one single supply would benefit from the energy-saving materials relief. However, the supply of cutting the loft hatch would be standard-rated, if it were supplied on its own.
Example 2
Sometimes, when individual goods and services are provided together, there is not a single dominant supply and the individual goods and services supplied together have equal importance but take the form of something else.
For example, if you install a central heating system consisting of:
- a conventional boiler
- radiators
- copper pipe
- radiator valves
- heating controls
Some components of the central heating system (thermostatic radiator valves and hot water system controls) may be zero-rated if supplied on their own, when installed in residential accommodation or in a building intended solely for a relevant charitable purposes. However, when they are supplied together they form a single standard-rated supply of a central heating system.
This is because a central heating system is not included in the list of energy saving-materials (read section 2.6 and 2.7) and the predominant elements of the supply in this example are standard-rated. However, the installation of a central heating system may still qualify for the reduced rate if it is grant-funded (read section 3.3).
Example 3
If you install a central heating system as described in Example 2, but with an air, ground or water source heat pump instead of a conventional boiler, this would be a single zero-rated supply because the principal elements are zero-rated.
Example 4
If you constructed an extension to a house and the walls and roof space were insulated as part of the construction, this would be one single standard-rated supply. This is because the construction of the extension is the principal element of the supply, which is standard-rated.
2.5.2 Mixed supplies
There are mixed (or multiple) supplies where one or more element is distinct and independent. Indicators of more than one supply taking place include when:
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separate pricing or invoicing
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the items are available separately
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there is a time differential between parts of the supply
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elements of the supply are not inter-dependent or connected
Where you’re undertaking more than one job at the same premises, the VAT liability will depend upon the circumstances.
For example, if you’re contracted to build an extension and, as part of the same contract required to fit thermostatic valves to all the radiators in the house, this is a single standard-rated supply of construction services.
However, if you have a contract to build an extension and sometime after the work has commenced, the homeowner separately asks you to install thermostatic valves, this is a supply that qualifies for relief.
2.6 New dwellings
If you install energy-saving materials during the course of construction of a new dwelling, your supply is zero-rated — the construction of the building and the installation of the energy-saving materials.
If you’re involved in the construction of new dwellings you should read Buildings and construction (VAT Notice 708).
2.7 Energy-saving materials covered by the zero rate
Energy-saving materials, when installed in residential accommodation or, from 1 February 2024, a building intended for use solely for a relevant charitable purpose, qualify for relief when they consist of any:
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controls for central heating and hot water systems (read section 2.8)
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draught stripping (read section 2.9)
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insulation (read section 2.10)
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solar panels (read section 2.11)
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wind turbines (read section 2.12)
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water turbines (read section 2.13)
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ground source heat pumps (read section 2.14)
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air source heat pumps (read section 2.15)
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micro combined heat and power units (read section 2.16)
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wood-fuelled boilers (read section 2.17)
From 1 February 2024 additional materials include:
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water source heat pumps (read section 2.18)
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batteries for storing energy converted from electricity (read section 2.19)
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smart diverters (read section 2.20)
In addition, from 1 February 2024, the temporary zero rate will apply to supplies of groundworks, or dredging a body of water, in order to install pipework or other equipment necessary for the operation of a ground or water source heat pump installed in (or in the curtilage of) residential accommodation or buildings intended for use solely for a relevant charitable purpose.
2.8 Controls for central heating and hot water systems
Central heating and hot water system controls include:
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manual or electronic timers
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thermostats
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mechanical or electronic valves, including thermostatic radiator valves
2.9 Draught stripping
Draught stripping products are strips that are fixed around windows, interior and exterior doors, and loft hatches to reduce draughts.
2.10 Insulation
Insulation means materials that are designed and installed because of their insulating qualities. This includes insulation for:
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walls
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floors
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ceilings
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roofs or lofts
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water tanks, pipes or other plumbing fittings
The relief does not apply to products such as curtains and carpets which are not usually installed simply as insulation.
2.11 Solar panels
Solar panels include all systems that are installed in, or on the site of, a building and that are:
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solar collectors such as evacuated tube or flat plate systems, together with associated pipework and equipment, such as circulation systems, pump, storage cylinder, control panel and heat exchanger
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photovoltaic (PV) panels with cabling, control panel and AC/DC inverter
2.12 Wind turbines
The installation of wind turbines in residential accommodation from 1 May 2023 (and in charitable buildings from 1 February 2024) to 31 March 2027 is zero-rated. This includes the installation of all equipment essential to the operation of wind turbines, including mounting poles, electrical cables, battery banks and voltage controllers.
After 31 March 2027, the reduced rate will apply to installations in residential accommodation and buildings used solely for a relevant charitable purpose in the United Kingdom.
2.13 Water turbines
From 1 May 2023 to 31 March 2027, the installation in residential accommodation, of water turbines, together with the installation of all equipment essential to the operation of water turbines, including electrical cables, battery banks and voltage controllers is zero-rated.
From 1 February 2024 to 31 March 2027, the installation of water turbines, in buildings used solely for a relevant charitable purpose is zero-rated. This includes the installation of all equipment essential to the operation of water turbines, including electrical cables, battery banks and voltage controllers.
After 31 March 2027, the reduced rate will apply to installations in the United Kingdom.
2.14 Ground source heat pumps
Ground source heat pumps benefit from the zero rate of VAT. These transfer energy from the natural heat stored in the earth to heat the home and domestic hot water. They can also be used to augment existing heating systems in the same way as solar panels.
From 1 February 2024 to 31 March 2027, the relief also includes preparatory work that is necessary for the installation of a ground source heat pump. The term refers to groundworks, or dredging of a body of water, carried out to install pipework or other equipment necessary for the operation of a ground source heat pump.
2.15 Air source heat pumps
Air source heat pumps use the air as a source of heat. They absorb heat from the outside or surrounding air and transfer that into useable heat in the home for space or water heating, or both.
Fixed air source heat pumps can be reversed so that they can draw heat from inside a building, thus providing cooling during the summer as well as indoor heating for colder periods of the year.
Only air source heat pumps that are permanently fixed and are not portable or moveable qualifies as energy-saving materials.
HMRC’s understanding is that most air conditioning units are air source heat pumps. However, in cases of doubt, deciding if any particular product is to be treated as an air source heat pump will depend on the facts of each case.
2.16 Micro combined heat and power units
These produce heat and hot water but, in addition, they also generate electricity.
2.17 Wood-fuelled boilers
These are boilers designed to be fuelled solely by wood (including wood chips and pellets), straw or similar vegetal matter.
Some boilers need hoppers to feed the fuel into the boiler. Where a hopper is integral to the installation of the boiler it’s included within the scope of the reduced rate in Northern Ireland and zero rate in Great Britain.
The standard rate applies to installations of ‘multi-fuel’ or ‘dual-fuel’ boilers which are designed to burn other non-renewable fuels such as coal or oil as well as wood. Stand-alone wood-burning stoves are also standard-rated.
The construction or conversion of buildings or extensions for use as log or fuel stores is standard-rated.
2.18 Water source heat pumps
These transfer energy from natural heat stored in a body of water. They can also be used to augment existing heating systems in the same way as solar panels.
From 1 February 2024, the supply of dredging of a body of water, in order to install pipework, or other equipment, necessary for the operation of a water source heat pump, qualifies for the zero rate.
Where such dredging is carried out by the installer of a water source heat pump (at the same time as the installation) they normally fall to be ancillary and form part of a single zero-rated supply (read section 2.5).
2.19 Batteries for storing energy converted from electricity
From 1 February 2024, electrical storage batteries installed in residential accommodation or buildings intended for use solely for a relevant charitable purpose qualifies for the temporary zero rate. These include:
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the retrofitting of a battery for storing electricity generated by one or more of the microgeneration systems including solar panels, wind turbines and water turbines (listed in section 2.7) — batteries installed as part of the installation of a microgeneration system listed in section 2.7, normally fall to be ancillary and form part of a single zero-rated supply (read section 2.5).
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the installation of a standalone battery for storing electricity from the grid (the mains electricity)
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the installation of a battery for storing electricity from one or more of the microgeneration systems (listed in section 2.7) and from the grid
2.20 Smart diverters
From 1 February 2024, the retrofitting of a smart diverter to one or more of the microgeneration systems (listed in section 2.7) installed in residential accommodation or buildings intended for use solely for a relevant charitable purpose qualifies for the temporary zero rate.
A smart diverter automatically diverts electricity generated by one or more microgeneration systems to electrical appliances in the accommodation or building, including other microgeneration systems such as ground and air source heat pumps.
Where a smart diverter is fitted as part of the installation of a microgeneration system (listed in 2.7) it will normally fall to be ancillary and form part of a single zero-rated supply (read section 2.5).
2.21 Residential accommodation
The relief for energy-saving materials applies to installations in residential accommodation. This includes:
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houses, blocks of flats or other dwellings
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armed forces residential accommodation
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children’s homes
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homes providing care for the elderly, disabled people, or people who suffer or have suffered from drug or alcohol dependency or mental disorder
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hospices
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institutions that are the sole or main residence of at least 90% of their residents
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monasteries, nunneries and similar religious communities
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residential accommodation for students or pupils
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self-catering holiday accommodation
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caravans used as a place of permanent habitation (such as a park home or static caravans sited on a permanent residential caravan park)
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houseboats that are designed or adapted for permanent habitation and have no means of self-propulsion, or other boats which are used as a person’s sole or main residence, such as canal boats and Dutch barges, on which the boat owner pays Council Tax or domestic rates
The standard rate applies to the installation of energy-saving materials in hospitals, prisons or similar institutions, hotels or inns or similar establishments.
2.22 Buildings intended solely for relevant charitable purposes
From 1 February 2024, the relief has been extended to include buildings intended for use solely for a relevant charitable purpose.
Use for a relevant charitable purpose means use by a charity in either or both the following ways, namely:
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as a village hall or similarly in providing social or recreational facilities for a local community
If you install energy-saving materials in such buildings, you should take reasonable steps to ensure that your customer will use the building for a relevant charitable purpose and retain the appropriate documentation. For example, you might ask your customer to provide you with a letter confirming the intended use of the building.
There is no requirement for your customer to provide you with a certificate (as is the case with some other construction projects) for the purposes of applying the relief for energy-saving materials. Further information about buildings for relevant charitable purposes can be found in section 14 of Buildings and construction (VAT Notice 708).
2.23 Other energy-efficient products
The installation of all other energy-efficient products, such as energy-efficient boilers (but read section 3 if the installation is grant-funded), secondary or double glazing, low-emissivity glass, or energy-efficient fridge freezers, are standard-rated.
3. Grant-funded installations of heating equipment eligible for relief but not under section 2
3.1 Reduced-rated installations
The reduced rate applies to the grant-funded installation of certain heating appliances, central heating and renewable source systems in the sole or main residence of a qualifying person (read section 3.8).
This includes the price of the equipment itself.
The reduced rate only applies to the extent that the supply is grant-funded (read section 3.9). However, if the supply is also an installation of energy-saving materials in residential accommodation, from 1 May 2023 to 31 March 2027, it qualifies for the zero rate, as explained in section 2.
If you supply heating equipment without installing them your supply is standard-rated, even if it’s grant-funded.
3.2 Heating appliances
The reduced rate applies to the installation of:
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closed solid fuel fire cassettes
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electric dual immersion water heaters with factory-insulated hot water tanks
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electric storage heaters
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gas-fired boilers
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gas room heaters with thermostatic controls
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oil-fired boilers
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radiators
3.3 Central heating systems
The reduced rate applies to the installation, repair and maintenance of a boiler, radiators, pipework and controls forming a central heating system.
This includes micro combined heat and power systems, which are heating systems that also generate electricity.
The reduced rate includes repairs and replacements of such equipment, whether or not the original system was installed under a relevant grant-funded scheme.
3.4 Renewable source heating systems
The reduced rate applies to the installation, repair and maintenance of renewable source heating systems.
This means space or water heating systems which use energy from:
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renewable sources, including solar, wind and hydroelectric power
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near renewable sources, including ground and air heat
3.5 Security goods
The grant-funded scheme relating to security goods linked to the installation of energy-saving materials or central heating systems has now been withdrawn.
3.6 Connection or reconnection to the mains gas supply
Where a qualifying person (see section 3.8) has been disconnected from the mains and re-connection is paid for under a grant scheme, that reconnection is eligible for the reduced rate.
3.7 Leasing arrangements
Under some grant-funded schemes, a leasing arrangement may be used to help fund the installation of a central heating system. Where this happens, the installer will install the central heating system as usual, but they’ll sell the boiler and radiators to a leasing company. This supply is standard-rated.
The leasing company, which will then own the goods, will make an annual lease charge to the qualifying person, which will be paid by grant funding. This supply is taxed at the reduced rate.
Where a leasing arrangement is used to help fund the installation of a central heating system, the following 2 payments may become due (besides the lease charge):
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termination fee — this is payable by the qualifying person or their landlord if the qualifying person moves to a new house during the 7-year lease period
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end of lease payment — the qualifying person must make a final payment to the lease company at the end of the lease period
Both of these are further payments for the lease of the equipment and are eligible for the reduced rate.
3.8 A qualifying person
A qualifying person is a person who receives a grant for the installation of heating appliances (read section 3.2) or for the installation, maintenance or repair of a central heating system (read section3.3) or for a renewable source heating system (read section 3.4) and either:
- is aged 60 or over
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receives one or more of the following benefits:
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Child Tax Credit (other than the family element)
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Council Tax Benefit
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Disability Living Allowance
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Disablement Pension
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Housing Benefit
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Income-based Jobseeker’s Allowance
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Income Support
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War Disablement Pension
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Working Tax Credit
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If there are 2 or more people living in a dwelling, and one person is a qualifying person and the other residents are not, the reduced rate will apply if the supply is to the qualifying person, and they’re eligible for the grant.
In practice, for a supply to be to a qualifying person, that person will have to be responsible for ordering the work to be done.
3.9 Grant-funded schemes
The reduced rate is only available for supplies made under a grant scheme that has an objective of funding the installation of energy-efficiency measures in low income homes.
There’ll usually be no need to look at the formal basis of the grant scheme concerned.
In practice, the explanatory material issued by those who organise schemes will usually make it clear what they will pay for.
If the material published by or about a scheme makes it clear that it funds the installation of energy-savings materials and so on, and it actually operates in line with those commitments, then the scheme can be treated as having the objective outlined.
3.10 Grants covering more than the installation of heating equipment
Grant-funding bodies may make awards to fund the combined cost of the installation of central heating systems, or heating appliances, and other building work, requiring the householder to pay the balance.
If you carry out other work, such as building repairs or maintenance, at the same time, that element of the work is standard-rated.
You must make a fair and reasonable apportionment of the charge made.
3.11 Contributions from householders’ own resources
The reduced rate only applies to work that’s grant-funded.
Where installation of central heating systems or heating appliances takes place in a house, and the grant does not cover the full cost of the work, householders will make their own contributions.
The installations paid for by these contributions are standard-rated. Where you do work that’s paid for like this, you need to apportion your charge accordingly.
3.12 Contributions from other sources
In addition to grants from the main grant-awarding bodies, and contributions from householders’ own resources, additional grants or contributions may be made by others.
This extra help may come, for example, from local authority hardship funds.
Installations paid for by other supplementary grants or contributions may also come within the scope of the reduced rate, if they meet all the conditions.
Installations paid for by contributions from landlords do not qualify and are standard-rated.
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Last updated 31 January 2024 + show all updates
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From 1 February 2024, the scope of the energy-saving materials relief is being extended to include installations in buildings used solely for relevant charitable purposes. The list of energy-saving materials is extended to include, water source heat pumps, electrical battery storage and smart diverters. The supply of services and materials required to install a ground or water source heat pump (for residential accommodation or buildings used solely for relevant charitable purposes) are also eligible for the relief.
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Guidance on the time-limited zero rate of VAT for installations of energy-saving materials installed in residential accommodation in Northern Ireland, with effect from 1 May 2023, has been added.
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Section 2.5 has updated information about installations by subcontractors in Great Britain and Northern Ireland.
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Updated with information about the legislative changes from 1 April 2022 to include when the zero, reduced and standard rate applies to the installation of energy-saving materials in Great Britain and Northern Ireland.
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Section 2.17 of the notice has been amended with updated information about air source heat pumps.
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Changes take effect from 1 October 2019 including the reduced rate availability and a new 60% test being introduced.
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First published.