Spring Statement: Rishi Sunak announces VAT relief for home energy efficiency retrofits

Image: HM Treasury

The Treasury typically prefers to frame Spring Statements as a subdued affair, with far less fanfare than for Budgets. But the rising cost of living and renewed calls for the UK to improve its energy security had placed pressure on Sunak to pull something bigger out of the box.

Delivering the Spring Statement, Sunak said: “The actions we have taken to sanction Putin’s regime are not cost-free for us. The invasion of Ukraine presents a risk to our recovery, as it does to countries around the world.

“The OBR has said specifically that there is unusually high uncertainty around the outlook. It is too early to know the full impact of the Ukraine war on the UK economy, but their initial view, combined with high global inflation and continuing supply chain pressures, means the OBR now forecasts growth this year of 3.8%.

“The war’s most significant impact domestically is on the cost of living. Covid and other global factors meant that goods and energy prices were already high…. The OBR expects inflation to rise further, averaging 7.4% this year.

“People should know that we will stand by them, as we have throughout the last two years.”

General measures to ease the cost of living crisis included an increase in the National Living Wage for those aged 23 and over, from £8.91 to £9.50. Elsewhere, the Household Support Fund was extended with a second £500m package; the amount of money each UK adult can earn without paying National Insurance and Income Tax was increased to £12,570, from £9,500; and the basic rate of income tax will be cut from 20% to 19% in 2024.

For businesses, Sunak emphasised the forthcoming 50% discount in rates for retail, hospitality and leisure companies from April. He also increased the employment allowance to £5,000 for small businesses.

There were, additionally, some inclusions which should help to reduce emissions as well as living costs.

Nonetheless, many of the changes that key green groups had been calling for failed to materialise – partly due to further delays to the publication of the new energy security strategy.

Here, edie rounds up what was – and what was not – included in environmental spending terms.

INCLUDED: New climate requests for the UK Infrastructure Bank

Late last week, Sunak wrote to the UK Infrastructure Bank’s chief executive John Flint to give him more information on how the Treasury would like the Bank to be used to tackle the energy price crisis, get the UK off of Russian fossil fuels, and scale clean technologies.

The letter stated: “I am pleased to have seen the Bank make its first investments into subsidy-free solar, wind turbine manufacturing capacity, ultrafast broadband and a new green bus route.

“The role the Bank can play in reducing the UK’s dependency on fossil fuels and increasing prosperity across the country has been brought into sharp focus by Russia’s unprovoked invasion of Ukraine. In particular, it is important that we take every step possible to improve our energy resilience, to protect us from future shocks and volatility in global markets. This does not change the long-term mission of the Bank but emphasises the need to make rapid progress on its net-zero goals, particularly where they overlap with the government’s renewed focus on energy security.”

Sunak goes on to state that “it is more important than ever” that the Bank backs clean energy, energy efficiency and measures to improve the UK’s climate resilience.

Greenhouse gas removals and investments in building retrofits, for the installation of low-carbon heating or measures to improve energy efficiency, are confirmed to be within the Bank’s scope. This means it will soon work with high street banks to develop low-cost loan or grant schemes for these technologies. 

INCLUDED: VAT relief on retrofit and renewables

Trade bodies, environmental groups, citizen’s groups and think-tanks have all written to the Treasury in recent days to urge a broader look at measures to improve energy efficiency and decarbonise heat at scale.

Measures proposed have included a temporary axing of VAT on home retrofit products and services. Sunak announced VAT relief for energy-saving products and home solar panels. The relief will be in place for at least five years. It covers things like insulation, triple glazing and renewable energy generation. Domestic battery energy storage is notably absent. 

He said: “We know that energy efficiency will make a big difference to bills. But, if homeowners want to install energy-saving materials, at the moment, only some items qualify for a 5% VAT relief and there are complex rules about who is eligible.

“The relief used to be more generous, but, from 2019, the European Court of Justice required us to restrict its eligibility. Thanks to Brexit, we’re no longer constrained by EU law.”

Sunak also said the changes will be discussed with Northern Ireland “as a matter of urgency”.

 VAT was also axed on wind and water turbines.

INCLUDED: An accelerated introduction of green business rates relief

At the last Budget, delivered in October 2021, Sunak confirmed a new rates relief scheme for businesses looking to fit low-carbon technologies onsite, including rooftop solar, battery storage and cycling infrastructure. Heat network installations will benefit from a 100% relief. 

This was originally set to run from 2023 to 2035. With today’s announcements, Sunak has brought its introduction forward to April 2022. 

NOT INCLUDED: Other measures to make retrofitting and low-carbon heating more available 

Also recommended by various trade bodies and green groups were an extension of the Boiler Upgrade Scheme; an expansion of the Social Housing Decarbonisation Fund; the shifting of legacy policy costs from energy bills to general government spending and a new national home insulation grant scheme.

None of these measures were announced by Sunak.

NOT INCLUDED: A fuel duty freeze

The Treasury confirmed late on Tuesday (22 March) that Sunak would maintain the current freeze on fuel duty. Sunak contradicted that at the Statement, confirming a 5p per litre reduction in fuel duty after prices at the pump reached record highs last week. The reduction will remain in effect for one year and take effect from 6pm tonight.

At previous Spring Statements and Budgets, green economy figures have criticised the Treasury for not increasing fuel duty. This time, however, the sentiment is broadly that a freeze – rather than a cut – would have been the right decision. It had been pointed out by the New Economics Foundation that a fuel duty cut would benefit the wealthiest homes rather than the poorest, and actually serve to make the UK more dependent on Russian energy imports.

NOT INCLUDED: More clarity on red diesel

Several sectors, including waste management and cold chain refrigeration, are currently able to use red diesel at a discount due to a special rebate costing the Treasury £1.5bn annually. With the current measures set to expire on 1 April, many sectors had called for information on an extension.  

The Association for Renewable Energy and Clean Technology (REA) had warned that, without an extension to the red diesel rebate scheme, there would be redundancies and closures in the organics recycling industry.

The REA’s head of organics and natural capital Jenny Grant said: While we strongly support the transition to sustainable and renewable fuels, removing the organics recycling sector’s entitlement to use red diesel at this time would add an unacceptable and unaffordable financial burden on businesses which are already facing a perfect storm of worsening cost pressures.”

NOT INCLUDED: New energy efficiency or renewable energy spending

Amid reports that the UK’s energy security strategy has been further delayed due to disagreements between Number 10 and other parts of Government on onshore wind, Sunak was not in a position to announce new, large-scale energy spending.

Instead, he emphasised schemes that are already underway, including the £950 Home Upgrade Grant scheme (HUG) and the Social Housing Decarbonisation Fund. He also mentioned the £9.1bn rebate and clawback scheme for domestic energy bills.

Several large media outlets are reporting that we can now expect the energy security strategy, originally promised by 13 March, next week. Click here for edie’s explainer on what is likely to be included. The Strategy has faced a multitude of delays, with reported disagreements between Boris Johnson and BEIS on fracking, and Boris Johnson and the Treasury on nuclear.

NOT INCLUDED: A windfall tax on fossil fuel companies

The Labour Party had been supported by many green groups, civil society groups and religious organisations over its proposals for a windfall tax on fossil fuel firms with North Sea operations. 

The Conservative Party has continued to argue against this move, arguing that energy majors need the money to invest in the low-carbon transition. 

Shadow Chancellor Rachel Reeves slammed Sunak for his decision not to introduce the windfall tax today. She said: “Who does the Chancellor prioritise? He continues to defend the record profits of oil and gas producers who, themselves, admit that they have more money than they know what to do with. BP describes this crisis as a cash machine for them but it is British people who are paying out. 

“And it is deeply regretable that the SNP have joined the Conservatives in wanting to shield oil and gas producers from Labour’s progressive measures.”

She said the tax would raise more than £3bn that “could be used to help families, businesses and pensioners”. 

Click here to access the Spring Statement documents in full on the HM Treasury website.

Sarah George

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