The European Commission has announced that it has referred the UK to the ECJ over its reduced VAT rate on the supply and installation of energy-saving materials. The reduced VAT rate for energy saving materials has been linked to the UK's “Green Deal” to improve the energy efficiency of buildings which is approved under EU state aid rules. However, the Commission says that the UK's application of the reduced rate on energy saving materials is in contravention of the VAT Directive.

The VAT Directive provides that Member States may apply reduced VAT rates to the supply of goods and services used in the housing sector, so long as this is part of a social policy. Energy saving materials could be covered by this provision if the conditions are met i.e. if they are used for social policy purposes in the construction, renovation and alteration of housing. However, according to the Commission there is no provision in the VAT Directive to allow a reduced VAT rate on “energy saving materials” specifically. By allowing a reduced VAT rate to all energy saving materials, the UK is therefore going beyond the scope of what is permitted under EU law according to the Commission.

The Commission sent a reasoned opinion to the United Kingdom in June 2012 (IP/12/676), but was not satisfied with the response and has now referred the matter to the ECJ.