VAT: CHANGES TO THE REDUCED RATE OF VAT FOR ENERGY SAVING MATERIALS

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Daniella Blake
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1 VAT: CHANGES TO THE REDUCED RATE OF VAT FOR ENERGY SAVING MATERIALS Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the consultation document VAT: Changes to the reduced rate of VAT for Energy Saving Materials (the Consultation) which was published by HMRC on 9 December Within this response, we also comment on the related draft provisions on VAT: installation of energy-saving materials published by HMRC and HM Treasury on 9 December 2015 alongside the Consultation as Clause 48 (the Clause) with a view to inclusion in Finance Bill Paragraph 8 of the related Explanatory Note (the Note) explains: This clause has been introduced following a judgment of the CJEU [Court of Justice of the European Union] which held that the UK had failed to apply the reduced rate relief for supplies of services of installing ESMs [Energy Saving Materials] correctly. These changes are designed to ensure that UK law is fully EU law compliant whilst seeking to retain as much of the existing relief as is possible. 1.4 Against that background, we wish to raise a concern about the implementation and operation of the proposed change. 1.5 Section and paragraph references in this response are to those used in the Consultation, the Clause and the Note unless otherwise stated. 2 Practicalities 2.1 The first paragraph of section 3 (Practicalities) of the Consultation identifies the situation where: It notes that: there could be a different VAT treatment depending upon the status of the customer (for example, whether or not the customer is a qualifying person ). Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 the different treatment will only arise in cases where the supply includes installed materials and the cost of the materials element of the supply is greater than the labour installation cost. 2.2 The second paragraph of the same section explains the significance of the status of the customer as follows: Following the change in legislation, where the cost of the materials element is greater than the labour element of a supply of installing ESMs, an installer will need to account for VAT at the standard rate (20%) on the material element (the labour element remains entitled to the reduced rate). However, if the supplier can demonstrate that its customer is a qualifying person, a relevant housing association or a building used solely for a relevant residential purpose. the whole supply will be entitled to the reduced rate (including the materials element). 2.3 The third paragraph of section 3 of the Consultation focuses on the practical issue of how an installer will determine whether the customer is a qualifying person. It observes: HMRC do not propose to prescribe the type of evidence that an installer needs to obtain in such a case as customers may provide different types of evidence. The requirement will be that the installer is able to demonstrate that the customer is a qualifying person. However, we would normally expect evidence to take the form of one of the following: a current copy of the customer s pension or benefit statement, a copy birth certificate, a copy passport or anything else that clearly demonstrates the customer is a qualifying person'. 2.4 Section 2A of the Consultation explains that, through the adoption of the Group 3 definition, a qualifying person is someone who:- a) is aged 60 or over; or b) is in receipt of one or more of the following benefits - i. council tax benefit; ii. disability living allowance; iii. any element of child tax credit except the family element, working tax credit, housing benefit or income support; iv. income based job-seekers allowance; v. disablement pension; vi. war disablement pension; vii. personal independence payment; viii. armed forces independence payment; ix. universal credit. P/ATTTSG/Submissions/2016 2

3 3 Our concern 3.1 We are concerned that placing the burden of determining whether a customer is a qualifying person on the installer will give rise to practical difficulties and that this in turn will mean that (contrary to the objective identified in paragraph 8 of the Note) access to the relief by qualifying persons is in practice curtailed. We detail our concern below. 3.2 The normally expected evidence that is specifically identified in the Consultation is a current copy of the customer s pension or benefit statement, a copy birth certificate or a copy passport. Assuming that the customer had those documents available, they would certainly provide evidence to the installer of the customer s date of birth and thereby demonstrate whether they were aged 60 or over. However, even with the relevant documents being available, the other categories of qualification might well be less apparent. For example: How would the installer readily establish whether the element of child tax credit was or was not one of the four exclude elements (see 2.4(b)(iii) above)? How would the installer know that the current copy of the customer s benefit statement which was provided to them when the installation was booked was also current at the time that the installation work was undertaken? The customer s receipt of the benefit might have terminated shortly before the order was received or between the order and the undertaking of the work. 3.3 The Consultation assumes that the installer will take a copy of the documentary evidence that was presented to them. That requires the installer to: (a) have accepted the order at premises with copying facilities; or (b) have mobile copying facilities; or (c) take the original document away in order to copy it. In the context of ESM installation work, we envisage that the order process is most likely to be completed at the customer s home so alternative (a) may not be appropriate. Portable technology increases the possibility of the installer being able to photograph the relevant document (alternative (b)) but that does not guarantee that they will be able to produce the evidence if subsequently requested to do so perhaps many months after completion of the installation. The potential for identity theft and other fraud makes alternative (c) very undesirable. On a general but potentially very significant point, we think that consideration may need to be given to the data protection implications of installers retaining such evidence about their customers. 3.4 It occurs to us that the adoption of the Group 3 definition for the proposed provision may have overlooked the fact that in the context of grant-funded installations to which the definition P/ATTTSG/Submissions/2016 3

4 currently applies (such as the Warm Front scheme), the responsibility for establishing eligibility lies not with the installer but with the Warm Front Manager or local authority. That at least is how the process is described in HMRC s VENSAV manual at VENSAV4400, see: Consistent with the objective of seeking to retain as much of the existing relief as is possible, we think that it would be much more appropriate for the customer to self-certify their qualification as a qualifying person if necessary by quoting a reference number on a relevant document - and providing that self-certification form to the installer for retention and possible future inspection. In that way, the responsibility for the accuracy of the claim for qualifying person status would properly remain with that individual, the installer would be entitled to rely upon it (unless it was clear that they knowingly accepted a declaration that they knew to be invalid) and would have hard-form evidence for filing with the installation order details. We think that such a light-touch regime would be much more likely to meet the Government s objective. We note that VAT legislation includes situations where self-certification of eligibility by the recipient of a supply is prescribed see for example VATA 1994, Schedule 8, Group 5, Note 12 which reads: (12) Where all or part of a building is intended for use solely for a relevant residential purpose or a relevant charitable purpose (a) a supply relating to the building (or any part of it) shall not be taken for the purposes of items 2 and 4 as relating to a building intended for such use unless it is made to a person who intends to use the building (or part) for such a purpose; and (b) a grant or other supply relating to the building (or any part of it) shall not be taken as relating to a building intended for such use unless before it is made the person to whom it is made has given to the person making it a certificate in such form as may be specified in a notice published by the Commissioners stating that the grant or other supply (or a specified part of it) so relates. We think that a comparable provision enabling the qualifying person to self-certify their eligibility would meet the objective of targeting the relief appropriately at the same time as avoiding adding an awkward administrative burden on ESM installers. 4 Consultation Questions Our replies below to the two Consultation questions need to be read in the context of our comments above. Question One: Does the legislation as drafted achieve the objectives as described in this document? If not, why not? P/ATTTSG/Submissions/2016 4

5 4.1 We think that the draft legislation itself has the potential to achieve the described objectives but that imposing the burden and cost of establishing a customer s entitlement to the relief on the installer could significantly reduce take-up. Question Two Do you have any other comments on the proposed implementation of these changes? 4.2 We have studied the judgment of the CJEU (see: We can see from this why the changes proposed by the Clause are necessary in order to bring UK law into line with EU provisions. In the words of paragraph 32 of the judgement, the effect of the existing UK legislation: is to apply the reduced rate of VAT to the provision, construction, renovation and alteration of any housing, with no account being taken of the restriction pertaining to the social context within which such operations must take place, in accordance with the requirements of the VAT Directive. By stipulating the categories of person who can qualify for the reduced rate, that defect in the legislation will be addressed. 4.3 The judgment does not, however, prescribe the manner in which the UK should implement the changes or regulate compliance. Neither, notably, does the Clause attempt to do so. We must, therefore question the authority for both the statement in the Consultation that The requirement will be that the installer is able to demonstrate that the customer is a qualifying person and the consequential proposition that the installer must obtain documentary evidence that their customer is a qualifying person (see section 2.3 above). 4.4 We obviously do not know what matters were discussed in any negotiations between the UK Government and the European Commission in respect of the proposed change to UK law or what evidence might have been offered by the Commission concerning the measures implemented by other EU jurisdictions to ensure compliance with the restriction pertaining to the social context (referred to in 4.2 above). However, the impression is left that the imposition on the installer of establishing their customer s eligibility for the relief (currently in the Consultation but presumably to be included in departmental guidance) introduces an element of gold-plating to what is actually required in order to comply with the CJEU judgment. 4.5 If there is in fact no requirement under EU law for the imposition of an obligation on the installer to establish their customer s status as a qualifying person, a light-touch compliance test (such as our suggested self-certification procedure) would seem to provide appropriate compliance with the EU legislation. 4.6 In view of the VAT lock provision (section 2 of Finance (No 2) Act 2015) as referred to in section 5 of the Consultation, we anticipate that the Government will be keen to avoid any gold-plating of compliance procedures. P/ATTTSG/Submissions/2016 5

6 5 Contact details 5.1 Should you wish to discuss any aspect of these comments, please contact our relevant Technical Officer, Will Silsby, on or at: Yours sincerely Michael Steed President of the Association of Taxation Technicians 6 Note 6.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,700 members and Fellows together with over 5,600 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2016 6

FINANCE BILL 2016 DRAFT CLAUSES DEDUCTION FOR REPLACEMENT OF FURNITURE ETC

FINANCE BILL 2016 DRAFT CLAUSES DEDUCTION FOR REPLACEMENT OF FURNITURE ETC Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased