18 March 1998

Andrew Warren, Director of the Association for the Conservation of Energy

The Budget 17 March 1998

I was particularly disappointed in the decision on VAT rates covering energy-saving materials. There has been now for some years a direct distortion of the rates being charged, between  the rate levied on energy consumption, which is now just 5%, and the rate on energy conservation material which is currently at 17.5 %. For some time it has been acknowledged, even by the Treasury, that this is an anomaly – indeed an anomaly which in the 1993 Budget was described as one which "makes a nonsense of any attempt to use the tax system to assist the environment".

However, although two years ago the Labour Treasury team went into the lobbies in an amendment to the 1996 Budget, which sought to equalise the rates of VAT on energy conservation and consumption - which sadly was lost by just one vote. When these same politicians actually entered the Treasury, their enthusiasm to achieve this objective seemed to wane. All we obtained yesterday was a concession that it was reasonable in principle to equalise these taxes but only for certain government-run schemes. The argument that they have put forward is that under European VAT legislation we are not allowed to reduce the rate of tax, of VAT, on energy-saving materials at all, except for social housing.

The argument that we would put is that there are many opportunities without the programmes that have been put forward which pertain to social housing, which the Government have not taken. But also this same VAT legislation covers other member states, and at least one other member state, to our knowledge – specifically Belgium – has in the last couple of years reduced the level of VAT levied on energy-saving materials from 22% to 6%, and this apparently has not led to anyone of the European Commission officially reprimanding them or anything of that sort.

Last week the new House of Commons Environmental Audit Select Committee reported on their pre-Budget report on various measures which they would anticipate being in this Budget. They had interviewed the Financial Secretary to the Treasury (Dawn Primarolo) on the matter. They did declare themselves dissatisfied with her replies, and they described it as essentially "a lack of political will", which would stop this very necessary change of equalising of the tax system.

Now the line that the Financial Secretary put forward to the cross-examining committee was that she had received advice from the European Commission that it was not possible to reduce the level of VAT across the board. However, two separate members of the committee, Dr Brian Iddon and Cynog Dafis, had asked parliamentary questions seeking the text both of the initial request to the European Commission for guidance, and indeed a copy of the guidance itself. Both have been refused copies of that evidence. And indeed without that it is difficult for anyone to form a reliable judgement as to whether or not the Customs and Excise line is indeed an accurate one.

The Cost of these Measures

The Treasury have changed their minds as to the cost to them, between the November pre-Budget statement and the actual March Budget. Apparently achieving the same objective has now moved from 6 million per annum to 10 million per annum. It is not quite clear why that has happened, as the first figure came out of a lengthy Treasury publication, in which they claimed that if they were to institute an overall VAT equalisation of all energy-saving materials, then the total cost of that to the Treasury would be some 40 million per annum. In practice we  would dispute that figure for one pertinent reason. That figure is estimated on the assumption that by reducing the price of energy-saving materials there would be no increase in purchasing. But the industry argue that there would in practice be at least a 10% stimulus to the market from such an initiative, which would in turn increase the revenue to the Treasury and thus substantially reduce this 40 million annual loss.

It is strictly Customs and Excise, this is why Dawn Primarolo has been dealing with this issue. I think it is fair to say that, judging from reports that have been published in national papers, that it is due almost certainly to Customs and Excise rather than the politicians. The Customs and Excise were charged with producing a paper by the autumn 1997 on the rights and wrongs of equalising VAT. According to a story in the Independent, which appeared, I think in August, the Customs and Excise’s initial report said, "make no change whatsoever". Now that was overruled by the politicians in the Treasury, who said we will have no credibility if we make no change whatsoever, but the officials seem to have persuaded them that they should make as limited a change as the options put before us on Budget day.

Savings in CO2 Emmissions

So far as the carbon emission reductions are concerned, the Financial Secretary to the Treasury did address this issue when she went before the Environmental Audit Committee. On that occasion she did concede that there would be no direct savings that would accrue from the arrangements as proposed. Indeed on 11 December 1997 Dawn Primarolo stated that "the environmental benefits of such a limited reduced rate would be small, because the benefit of to such householders may be taken in warmer houses rather than reduced fuel consumption". Conversely, appearing before the Commons Environmental Audit Committee on 10 February 1998 Ms Primarolo said "a general VAT reduction on energy-saving materials has a measurable impact on carbon dioxide emissions".

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