News analysis with BESA
Industry calls for VAT cut to address energy crisis
BESA is one of several industry bodies calling for VAT to be scrapped on renovation and retrofi t building work to help reduce energy consumption in the face of rising costs and uncertain global gas and oil supplies.
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urrently, a high proportion of retrofi t works for existing buildings are subject to the full 20% VAT rate whereas most new build work is
exempt. This runs counter to the government’s push for better energy effi ciency and reduced embodied carbon because it disincentivises investment in building services upgrades. It is also extremely confusing because some
renovation work does qualify for the lower 5% VAT rate and there are often disputes between clients, builders and HMRC over which rate applies. Therefore, a full abolition of VAT on retrofi ts would clarify the situation and increase investment in work that is vitally needed to bring our existing building stock up to a higher standard and more in line with the government’s net zero ambitions. The surge in energy prices around the world has added to a sense of urgency around the need to improve energy effi ciency through retrofi tting and renovation. The raising of the price cap on consumer fuel bills has exposed more people, including commercial building users, to more volatile pricing and Russia’s attack on Ukraine prompted another surge in prices.
Wholesale gas prices are now almost four times higher than they were this time last year and, in an open letter to the Chancellor Rishi Sunak, several bodies urged him to introduce a temporary cut to VAT immediately.
Pain
As well as mitigating some of the pain of rising fuel prices and helping the UK with its Net Zero agenda, it could even be promoted as one of the ‘benefi ts of Brexit’, they wrote, adding that the removal of VAT could create 42,000 extra full-time equivalent construction jobs and an additional 53,000 positions in the wider economy over fi ve years. The Association for Decentralised Energy (ADE)
was one of the signatories and believes zero-rating VAT would lead to increased private investment in home renovations. “It would simplify a complex system and result in a net gain for the economy, as well as improving the
UK’s housing stock and enabling more families to enjoy warm and healthy homes,” said chief executive Lily Frencham. “Ultimately, by failing to act on this, the government is missing a signifi cant opportunity to deliver on Net Zero compliant buildings.” The Climate Change Committee (CCC) has also highlighted the fact that the UK has one of ‘leakiest’ (most energy ineffi cient) housing stocks of all developed economies. Its members said just 46% of homes achieve an Energy Performance Certifi cate (EPC) rating of C or above. This represents a signifi cant improvement since 2008 but leaves the UK behind nations such as France and Germany. BESA believes that the dramatic surge in energy prices reinforces the need for a national programme
of building retrofi ts powered by fi nancial incentives. It applauded the government’s attempts to soften the blow to household fi nances following Ofgem’s decision to lift the energy price cap by 54% from April but said longer term measures were now needed to tackle the issue properly. “Millions of people are now facing real hardship
as a result of the soaring cost of gas and electricity, but we do not have a comprehensive plan for addressing a major contributory factor – the poor energy effi ciency of our buildings,” said BESA’s head of technical Graeme Fox. “The price of energy has never had a higher
profi le, but most of the talk about possible solutions either refers to short-term fi nancial measures and adjustments to the tax regime or very expensive technical fi xes like renewables and hydrogen. Yet, we can fi x energy effi ciency relatively quickly and cost-eff ectively through renovation and refurbishment,” added Fox. Ofgem has announced that the average energy
bill for around 18 million households will rise by almost £700 from April. Chancellor Rishi Sunak has promised support via council tax rebates and a discount scheme that will need to be paid back over fi ve years. However, energy market analysts have already predicted further price rises next year and beyond. “The government is trying to help by redistributing
taxpayers’ money to delay the full impact, but unless we fundamentally tackle the energy performance of both residential and commercial buildings this will simply become a bigger and bigger problem in the years to come,” said Fox.
Infl ation
“We are also in an artifi cial position because interest rates have been low for so long. The Bank of England has just nudged them up by another 0.25% and they are likely to rise again soon. This, along with higher infl ation, will put further pressure on families and businesses who are currently relying on cheap credit to keep their heads above water.” BESA also welcomed a report from the
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March 2022
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