Delta-ee – VAT increase on low carbon heating products would have a huge impact on an already struggling market

VAT increase on low carbon heating products would have a huge impact on an already struggling market

On the 4 June 2015, the European Court of Justice ruled that the UK has incorrectly applied the 5% VAT rate to the “supply and installation of energy-saving materials” in residential buildings. This includes lower carbon heating products such as heat pumps, micro-CHP and biomass boilers.

Delta-ee has run independent analysis looking at the customer and long term market impacts of a potential increase of VAT on low carbon products. Steven Ashurst, Research Manager of the Microgen Insight Service at Delta-ee comments:

“From our analysis it is clear that if a standard rate of VAT is applied to low carbon heating products, an already challenging market will become more difficult”.

Delta-ee’s Microgen Insight Service shows that for low carbon products, an increased rate of VAT of 20% typically adds more than £1,000 to the end user cost, which for GSHP and micro-CHP sees a drop in customer willingness to pay of more than 50%. Our primary research consistently shows that upfront costs are a major barrier to low carbon technologies.

Delta-ee’s Pathways^© Tool & Roadmap Service forecasts that under a scenario where a 20% VAT rate is applied to ASHP, GSHP, biomass boilers and mCHP, the combined annual sales would reach ~60,000 units per annum by 2025, 40% less than compared to the 5% VAT rate.

Philippa Hardy, Research Manager of the Pathways Tool and Roadmap Service at Delta-ee adds:

“With the new Zero Carbon Home policy, and with the Renewable Heat Incentive (RHI) and other key drivers under fresh scrutiny, it is clear that the potential implementation of the higher VAT rate would add to the challenges facing the market”.

Delta-ee has carried out sensitivity analysis on the effect of removing the RHI, Zero carbon homes and other drivers on our long term forecast of annual sales of residential heating technologies. Delta-ee’s findings on the significant impact of a VAT increase scenario are summarised in the latest Delta-ee Briefing Note which can be found on the homepage of our website – www.delta-ee.com.

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