Ministers pushed to reverse ‘policy madness’ of scrapping exemption on 5% tax rise for heat pumps, solar panels and batteries
Households planning to invest in green energy upgrades, including heat pumps and solar panels, risk a nationwide rush to find an installer or face hundreds of pounds in unexpected costs unless the government abandons its looming VAT increase.
Ministers are under growing pressure to reverse plans to scrap the 5% VAT exemption on home heat pumps, solar panels and batteries from 1 April which could add up to £1,530 on to the cost of a smart home energy system amid record demand for fossil fuel alternatives.
Industry groups have warned that the VAT cliff-edge could trigger a surge in demand for installations before the deadline, creating a “feast and famine” upheaval for the country’s nascent network of home energy installers after years of tepid interest from households.
Demand for home energy upgrades has reached record highs across the UK since the Middle East war caused gas market prices to double across Europe, pushing home energy bills to near four-year highs.
But the chancellor’s budget statement has signalled plans to shrink the total amount for heat pump grants over the coming financial year, while cutting the extra grant funding offered to heating oil users at the same time as VAT is reinstated.
Charlotte Lee, the chief executive of Heat Pump Association UK, said the abrupt change risks “creating a rush of applications ahead of April, disrupting the supply chain and making the process less predictable for consumers.
“The savings to government must be weighed against the risk of disrupting consumers, undermining industry confidence and stalling an emerging market,” she said.
The trade association is seeking clarity from the government over how the reintroduction of VAT will be applied so households can avoid an unexpected bill if their pre-booked installation is delayed until after the VAT exemption deadline.
Meanwhile, the decision to remove the VAT relief has been criticised as “inconsistent” with the government’s focus on helping to protect bill payers from the surging cost of fossil fuels, and “total policy madness” after ministers cut VAT on electricity bills in part to encourage electric alternatives to fossil fuels.
The Liberal Democrats said the rollback of the tax exemption could mean a household planning to fit an air-source heat pump, a 4KW solar installation, and a home battery would face an extra £1,530 cost unless it is able to undertake the work before April.
Pippa Heylings, the Liberal Democrat’s spokesperson for Energy Security and Net Zero, said: “It is total policy madness for the government to strip VAT from electricity bills with one hand, only to slap it straight back on to heat pumps with the other. They are telling families to switch to clean electricity, while simultaneously punishing them with a £1,530 tax hike for buying the very kit needed to do so.”
Heylings called on ministers to “urgently reverse this shortsighted heat pump tax”, a demand echoed by energy industry leaders who fear the rise may undermine government schemes to support the industry, which includes the launch of state-backed low-interest loans.
Chris Hewett, the chief executive of Solar Energy UK, said the rise would “raise the cost of the loans scheme that has only just been launched” and would be “inconsistent with the government’s intention for more people to enjoy the benefits of home solar and battery systems”.
“With domestic electricity bills now zero-rated until July next year, saving energy will be taxed more heavily than consuming it – a perverse incentive. We will be urging the government to reverse course,” he said.
A Department for Energy Security and Net Zero spokesperson said: “More and more families are switching to clean energy technology, with record numbers of people applying for heat pumps and receiving grants through the Boiler Upgrade Scheme in September.
“We are driving forward electrification and the clean tech market, protecting support for low-income families and launching our new warm homes loan scheme so households can purchase heat pumps, solar panels and batteries at no upfront cost.”
