British minister ready for fight over ‘green’ VAT

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The British government has no intention of raising VAT on energy efficiency products from 5% to 20%, bypassing a ruling of the European Commission that urged London to bring its legislation into line or be sued in the EU Court of Justice. Some MEPs are joining the UK in its cause, calling the Commission's ruling "complete nonsense".

British Energy and Climate Change Minister Gregory Barker announced on Twitter that he has the support of the British government in fighting the EU's ruling on a 'green VAT'.

Barker started a Twitter campaign against the tax on energy-efficiency products on 10 September. VAT was reduced to 5% on energy efficiency products in the UK to tackle fuel poverty, reduce carbon emissions and create jobs.

“UK government tells me it will fight an EU ruling that [would increase the] 5% VAT on energy efficiency products,” Barker wrote on the social media website.

Current EU rules on value-added tax, set out in the 2006 VAT Directive, specify that member states must subject supplies of goods and services to a rate of at least 15%. Britain's discount VAT rate on such energy saving goods breached EU legislation, the Commission said in a statement

"Under EU VAT rules, member states can only apply reduced VAT rates to a limited number of goods and services," the Commission said, adding that those did not include the supply and installation of energy-saving materials. 

Britain applies a lower rate of VAT on the supply and installation of solar panels, wind and water turbines, controls for heating and hot water systems, as well as insulation. All of these are key to the implementation of the UK's new energy savings programme called the Green Deal, due to be rolled out in October. 

The list of products and services eligible for reduced VAT rates spelt out in Annex III of the VAT Directive includes items such as medical equipment, passenger transport and theatre or cinema tickets. The list was last updated in 2009, but only to include local services such as meals, haircuts and home repairs. It can only be changed by unanimous decision from the 27 EU member states, making any amendment difficult.

The UK had one primary ally, France, in its fight to keep the 5% VAT on energy-saving products. France and Britain have long tried pushing for environmentally friendly goods, such as energy-efficient light bulbs and insulation materials, to be added to the list of products eligible for reduced VAT. 

But most EU countries rejected the idea, saying other tools should be preferred. This time, however, some MEPs are fighting, together with the UK, against the Commission's ruling. 

“Complete nonsense”

"I find this complete nonsense, to really prevent the British government from favouring energy efficiency investments by lowering VAT. Frankly, I don't understand … this is a decision where the Commission is doing itself  huge damage", Green MEP Claude Turmes said. 

British Conservative MEP Vicky Ford also criticised the Commission's lack of consistency on energy-saving legislation.

“On one hand they are telling us, 'We want energy savings', but on the other hand they appear to be removing a key policy. I have always fought for energy savings, but I have also fought for member states to have flexibility so they can introduce energy schemes which will  work in their own country", she said, adding that she was "extremely frustrated" by the ruling. 

British Conservative MEP Vicky Ford said: "When you see countries genuinely trying to achieve energy savings and then risking to get sued at the EU Court of Justice of course you're going to get worried as to whether the savings ambitions will be achieved. I genuinely want to see energy savings encouraged and implemented both in my member state and others."

"The European Commission is of course only applying the law. However, how can the commission claim to lead the fight against climate change one day and then push up the price of insulation the next?" said the Conservative environment spokesman in the European Parliament, Martin Callanan.

"Where is the consistency? We want an energy efficiency legislation and now purely from idelogical reasons it prevents a government from curb taxes, which is meant to favour energy savings? I think the Commission cannot give me any rationale on this after proposing the Energy Efficiency Directive," Green MEP Claude Turmes of Luxembourg said.

The UK applies a reduced rate of VAT to the installation of energy-saving materials in various types of building. However, the European Commission has initiated legal proceedings against the UK on the basis that this reduced rate is not allowed in EU law and the UK is therefore in breach of its obligations as a member state of the European Union.

Current EU rules on value-added tax (VAT), set out in the 2006 VAT Directive, specify that member states must subject supplies of goods and services to a rate of at least 15%. However, they also allow countries to apply reduced rates as low as 5% to a broad range of areas deemed essential, like medicines or labour-intensive services, including renovation of private dwellings, cleaning and hairdressing.

France and Britain have long tried pushing for environmentally-friendly goods, such as energy efficient light bulbs and insulation materials to be added to the list. But most EU countries rejected the idea, saying other tools should be preferred. The Commission tried breaking the stalemate in a broader proposal for an energy taxation directive, which was recently shot down by Parliament.

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