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Air conditioning units qualify for zero rate (0%) VAT in the UK- Qualifying Energy Saving Material as defined by HMRC.
In the spring 2022 Statement the chancellor Rishi Sunak has announced that a VAT relief will be introduced to help encourage the installation of energy saving materials (ESMs). This appears to be one of the benefits of Brexit as now the UK is not bound by Brussels when it’s implementing it’s domestic VAT rules. The UK has exercised its right to reverse a decision made in Europe (in 2019) which restricted the 5% VAT relief on energy saving materials. In the recent spring budget ESMs will now get a further boost by reducing from 5% to 0% VAT for a period of five years. This effectively means that households who get ESMs installed will pay far less by saving on the VAT that the installers would normally have to charge such as Seasonal Control.
So do Air conditioning installers need to charge VAT on domestic installations?
The new announcement for the VAT relief means NO, they do not need to charge VAT to residential customers as long as a few rules are followed.
Prior to this measure only some energy-saving materials qualified for the Reduced rate VAT relief at 5%. However from the 1st of April 2022 – 31st of March 2027, Zero rate VAT will apply to cover the installation of energy saving materials in the whole of the UK. Another benefit is that the definition of energy saving materials would also be expanded to cover a lot more additional technologies.
When it comes to heating the home will this also include air conditioning units similar to boiler systems and thermostats?
Air conditioning units are covered because they are considered to be air source heat pumps by virtue of its technology and dual use. The exemption for VAT relief will also apply here.
Does the 60% installation to materials test on air source heat pumps still play by HMRC?
Not any more, there was previously a 60% test ordained by HMRC, where if materials and labour were both provided it was a requirement that at least 60% was labour related in order to enjoy the 5% VAT rate. Otherwise, the standard rate of the VAT would have been applied on a supply of Air conditioning installation or service by a qualifying installer on a qualifying premise. The temporary VAT rate will encourage the installation of these energy saving materials particularly when energy prices are hitting record highs and squeezing household budgets. Inevitably this is a very welcome measure and will boost this sector. It is important to note that this VAT relief is only for domestic properties and not for commercial purposes. Since air conditioning units are considered to be air source heat pumps this will qualify for zero rating. Resellers of Air con units only (i.e without install) will continue to charge 20% VAT. So its better getting the installation and unit purchased from the likes of Seasonal Control Ltd using its qualified engineers, to save on the VAT and get it VAT FREE.
After a lot of lobbying by the industry air heat source pumps was specifically expanded to include air conditioning in 2021 therefore the new legislation will include air source heat pumps as using air conditioning units. The technology is such that heat is absorbed from the environment and transferred out of the home in order to provide a cooling effect. Please note this will only apply to fixed air source heat pumps and not portable ones.
The zero rate / 0% will not apply to the material or equipment itself when bought from a supplier on its own. To qualify for the 0% rate VAT the AC installer has to be the one supplying the unit and can then Zero rate VAT his whole supply to the domestic customer thus saving the customer the VAT had they gone and purchased it from the open market. HMRC’s understanding is that most air condition units are air source heat pumps and where this does not apply then of course the 0% VAT rating will be impacted. Seasonal Control ensures that the units it supplies will qualify for the Zero-rated VAT and follows the relevant HMRC rules to ensure it is compliant.
