Why the ECJ is making green house measures more costly

Anna Sonny, 5 June 2015

The European Court of Justice has ruled against the UK’s policy of reducing tax rates for certain energy-saving materials. To encourage energy efficiency in the UK, there is a tax rate of 5% when certain energy-saving products, including solar panels, draught insulation, and controls for central heating and hot water systems, are installed in homes.

The ECJ claims that the UK’s reduced tax for these materials is not among the specified products that qualify for reduced VAT rates in the EU’s VAT directive. The directive only allows for reduced tax on ‘provision, construction, renovation and alteration of housing, as part of a social policy’ and ‘renovation and repairing of private dwellings’.

According to the ECJ the UK’s reduced tax rate is not a social policy because it does not discriminate, offering the 5% rate for energy-saving product installation in all types of housing.

The ECJ ruling endangers Chancellor George Osborne’s ‘triple lock’ commitment, set out in the Queen’s Speech, to not raise income tax, National Insurance contributions or VAT during the Conservative’s five-year term in office. Since the ECJ has ruled that the 5% tax rate flouts EU law, the UK government will have to comply or face financial penalties.

This conflict between UK and EU law is ill-timed for Cameron, who is trying to negotiate reforms contingent on Britain remaining in the EU, and who needs to prove to the British public that he can protect British interests from far-reaching EU laws.

One of the arguments for remaining in the EU is linked to that of the principle of subsidiarity – while some issues are best decided at the local level, other global issues, like climate change and fighting cross-border crime and terrorism are best done at the supranational level. It seems the EU and the UK have conflicting ideas about how to promote energy efficiency; while on one hand the EU encourages member states to stick to carbon reduction targets, on the other it is ruling against making it cheaper for UK residents to go green in the first place.

The question is whether this type of legislation should be decided in Brussels or in Westminster?