The Government's flagship Green Deal energy efficiency programme will not be damaged by an ongoing tax dispute with the European Commission, according to new analysis.
The UK Government has been warned to overhaul the VAT system regarding the scheme, which currently levies 5% sales tax on wall and loft insulation but a 20% rate on energy efficient windows and doors.
Whitehall is fiercely defending the tax position, claiming the Green Deal has a social purpose and is therefore exempt from tight European tax restrictions.
If, as expected, the European Commission refers the case to court to impose financial penalties it was feared the quadrupling of the sales tax could derail the Green Deal as many products would subsequently fail to cost less than the energy it would save, or qualify through the so-called 'Golden Rule'.
But now one Green Deal company has performed a cost calculation and found the increase if the UK is forced to raise VAT levels will be around £450 for an average project.
And according to Beverley-based Your Green Deal Provider this added cost can be entirely offset by an interest rate reduction of less than half a percent.
Managing Director John Johnson explained how his company's analysis showed little long-term effect following the escalating tax row with Brussels.
He added: “This issue has been in the wings for some time so as a pending Green Deal Provider we ran some numbers to determine how a change in VAT from 5% to 20% on products and materials involved in the deployment of Green Deal measures might affect a typical project as the labour content is currently costed at 20% anyway so therefore does not alter.
“If imposed, the impact would make a difference to the outcome of the Golden Rule, though it is actually not as critical as perhaps first thought when all the project costs are taken into account.”
John explains that the average project will cost £5000, which includes product and materials making up around 60% of that value at around £3000. The current 5% VAT rate comes out at £150 and at 20%, £600. A difference of £450
He continued: “Though any increase in VAT would be unwelcome the impact is fairly minor when you consider that a difference of 1% on the interest rate over 25 years will increase the repayment cost by £1250 so to offset the impact of an increase in VAT there would need to be a reduction realignment to the charged interest rate of 0.36%.
“Therefore it is the interest rates applied that make a much bigger impact on the initiative, not a possible, though unlikely change to how VAT is treated in this sector.
“On that basis it is the 7%+ interest rates forecast for this market that should be addressed as though the Golden Rule still works on a variety of measures, even at this rate, every 1% increase or decrease makes a significant impact on the project cost.”