SEA says missed chance to extend 0% VAT on energy-saving materials will cost 365,000 heat pumps

The Sustainable Energy Association (SEA) has said what it called a missed opportunity in the Autumn Budget to extend zero-rate VAT on energy-saving materials beyond April 2027 will result in 365,000 fewer heat pump installations over the next four years.

In its response to the Budget, the trade body said the tax increase to 5% would mean that, for the first time since 1998, energy saving would be taxed more heavily than energy consumption.

Dave Sowden, chief executive of the Sustainable Energy Association, said: "We continue to urge the Government not to take this retrograde step next April."

The VAT relief

According to the SEA's published analysis, the 0% VAT relief on energy-saving materials began in April 2022 and is due to expire on 31 March 2027. The association said its modelling suggests reintroducing the higher rate would reduce demand and lead to fewer heat pump installations.

The SEA's press release put the wider effect at a negative impact of £380.5m on the UK economy by 2040, with installer revenue falling by up to £39m a year by the same date.

The association noted that the Budget included plans to bring heat batteries within the reduced rate, but said the measures it welcomed were effectively wiped out by the missed opportunity to extend the zero rate.

In its analysis, the SEA recommends that the government extend the 0% relief until at least 2030, to align with the Warm Homes Plan, and confirm any extension as early as possible to give certainty to consumers, installers, manufacturers and investors.

Boiler Upgrade Scheme

The SEA also said it remained concerned at what it called effective cuts to the Boiler Upgrade Scheme (BUS) budget, with the scheme capped at £400m. It described the BUS as the main market driver for growth in retrofit electrified heating and said market growth was already stagnating.

The Department for Energy Security and Net Zero's Warm Homes Plan says the BUS is funded with £2.7bn to 2030.

Sowden said levies on electricity bills "will prolong higher running costs for electrified heat".

Loan scheme and electricity VAT

The SEA welcomed the Warm Homes Loan Scheme as a positive step that would help consumers who may still struggle to raise funds for clean energy measures. It also welcomed the extension of the zero rate of VAT on electricity.

According to the department's factsheet, Warm Homes Loan Scheme loans are available to households across the UK, including England, Scotland, Wales and Northern Ireland, and loans for an air-to-water heat pump are capped at £20,000.

HM Treasury's news release on the Budget, delivered by Chancellor John Healey, said the temporary VAT cut on electricity bills would be extended until 1 July 2027.

The SEA began as the Micropower Council and has been known as the Sustainable Energy Association since 2014.

On the SEA's account, the 0% VAT relief on energy-saving materials is set to expire on 31 March 2027.