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Flashback on ECJ Cases – C-161/14 (Commission v United Kingdom) – UK reduced rate VAT for energy-efficient materials infringes VAT Directive

On June 4, 2015, the ECJ issued its decision in the case C-161/14 (Commission v United Kingdom).

Context: Failure of a Member State to fulfil obligations — Common system of value added tax — Directive 2006/112/EC — Article 98(2) — Category (10) of Annex III — Reduced rate of VAT applicable to the provision, construction, renovation and alteration of housing, as part of a social policy — Category (10a) of Annex III — Reduced rate of VAT applicable to renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied — National legislation applying a reduced rate of VAT to supplies of services of installing ‘energy-saving materials’ and supplies of such materials


Article in the EU VAT Directive

Article 98 of the EU VAT Directive 2006/112/EC.

Article 98
1. Member States may apply either one or two reduced rates.
2. The reduced rates shall apply only to supplies of goods or services in the categories set out in Annex III.
The reduced rates shall not apply to electronically supplied services with the exception of those falling under point (6) of Annex III.
3. When applying the reduced rates provided for in paragraph 1 to categories of goods, Member States may use the Combined Nomenclature to establish the precise coverage of the category concerned.


Facts 

  • By letter of 29 September 2011, the Commission gave formal notice to the United Kingdom that it should bring to an end the incompatibility of the system of reduced VAT rates provided for in Section 29A of the VAT Act, as specified in Part 2, Group 2, of Schedule 7A to that act, with the provisions of Article 98 of the VAT Directive, read together with Annex III to that directive.
  • By letter of 29 November 2011, the United Kingdom replied that it did not agree with the Commission. The United Kingdom accepted that its legislation was contrary to EU law, but only to the extent that it provided for the application of a reduced rate of VAT to supplies of goods and services made in respect of buildings intended for charitable purposes. In that letter, the United Kingdom confirmed its intention to withdraw from the 2013 Budget the reduced rate of VAT applied to the installation of energy-saving materials in buildings intended for use solely for a relevant charitable purpose.
  • On 21 June 2012 the Commission sent to the United Kingdom a reasoned opinion in which it restated it position. In its reply of 16 August 2012, the United Kingdom maintained that its legislation complied with EU law, since the reduced rate of VAT concerning buildings intended for charitable purposes had been removed.
  • As the Commission was not satisfied with the United Kingdom’s reply, it decided to bring this action.

The action

Arguments of the parties

  • While the Commission withdraws from the scope of its action the complaint with regard to the application of the reduced rate of VAT to supplies of energy-saving materials and supplies of services of installing such materials in buildings intended for use for charitable purposes, the Commission confirms that, with respect to the remainder, the national law at issue does not comply with the conditions laid down for the reduced rate of VAT as stated in Categories 10 and 10a of Annex III to the VAT Directive.
  • First, according to the Commission, Category 10 of that annex, which refers to ‘provision, construction, renovation and alteration of housing, as part of a social policy’, does not cover the provision and installation of ‘energy-saving materials’ as referred to in Part 2, Group 2, of Schedule 7A to the VAT Act. In that regard, it is apparent from the majority of language versions of Annex III to the VAT Directive that it is the supply of housing in itself which must be part of a social policy if the services supplied are to qualify for the reduced rate of VAT. The Commission considers that social policy in the field of housing includes governmental interventions to enhance housing opportunities for people on low income and to ensure equitable access to housing, such as through the direct provision of social housing.
  • The Commission maintains that a policy of promoting the use of energy-saving materials in the general housing stock does not constitute such a social policy. The reduced rate at issue, which applies without reference to social conditions, was adopted by the United Kingdom not for reasons of exclusively social interest or, at the least, for reasons of principally social interest, but to serve environmental or energy policy objectives, in the interests of society as a whole, unconnected to the issue of housing as part of a social policy. By adopting Directive 2009/47 the Council of the European Union specifically did not accept the Commission’s proposal to extend the scope of the reduced VAT rates to all renovation and repair work aiming at energy-saving.
  • Second, the Commission maintains that the provisions of national law at issue do not comply with the condition laid down in Category 10a of Annex III to the VAT Directive, which provides that a reduced rate of VAT can be applied only to the renovation and repairing of private dwellings, excluding materials which account for a significant part of the value of the service supplied.
  • As regards the scope of Category 10 of Annex III to the VAT Directive, the United Kingdom contends that it is apparent from the various language versions of that provision that operations at a reduced rate of VAT must be justified by a social policy which applies either to those operations, or to the housing in question, or to both.
  • As regards the United Kingdom, its social policy in the housing sector operates at two levels, with some initiatives that are directed generally, in the light of the problem of housing in the United Kingdom, at the entire population, and other more specific initiatives which are directed at a specific segment or group of segments of society. The application of a reduced rate of VAT to supplies of energy-saving materials and services involving installation of such materials in housing reduces the costs of improvements made to that housing. Households are thereby enabled to maintain their living standards with respect to heating and power, those two factors being very significant items of household expenditure. The United Kingdom claims that that reduced rate therefore addresses an obvious social need.
  • The United Kingdom accepts that, in the event that the Court were to hold that the provisions of national law at issue did not fall within the scope of Category 10 of Annex III to the VAT Directive, which it disputes, but fell within the scope of Category 10a of that annex, those provisions do not comply with the exclusion laid down by that provision, with regard to materials which account for a significant part of the value of the service supplied. The United Kingdom submits however that the ‘installing’ of the materials which are referred to by the provisions of national law at issue consists in alteration that is equivalent to either ‘renovation’ or ‘repairing’ of an existing dwelling, as referred to in Category 10a. Contrary to what is claimed by the Commission, the reduced rate of VAT laid down by those provisions of national law is not therefore applicable to the ‘provision’ and ‘construction’ of private dwellings, with respect to which, moreover, the zero rate is applicable in accordance with Schedule 8 to the VAT Act.

Questions

The Court must declare that, by applying a reduced rate of VAT to supplies of services of installing ‘energy-saving materials’ and to supplies of such materials by a person who installs those materials in residential accommodation:

–        to the extent that those supplies cannot be considered as ‘the provision, construction, renovation and alteration of housing, as part of a social policy’ for the purposes of Category 10 of Annex III to the VAT Directive;

–        to the extent that those supplies fall outside the purview of ‘renovation and repairing of private dwellings’ for the purposes of Category 10a of Annex III to the VAT Directive, and

–        to the extent that even where those supplies fall within the purview of renovation and repairing of private dwellings for the purposes of Category 10a of Annex III to that directive, those supplies include materials which account for a significant part of the value of the services supplied,

the United Kingdom has failed to fulfil its obligations under Article 98 of the VAT Directive, read together with Annex III to that directive.


AG Opinion

None


Decision

1. Declares that, by applying a reduced rate of value added tax to supplies of services of installing ‘energy-saving materials’ and to supplies of such materials by a person who installs those materials in residential accommodation:

– to the extent that those supplies cannot be considered as ‘the provision, construction, renovation and alteration of housing, as part of a social policy’ for the purposes of Category 10 of Annex III to Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2009/47/EC of 5 May 2009;

– to the extent that those supplies fall outside the purview of ‘renovation and repairing of private dwellings’ for the purposes of Category 10a of Annex III to that directive, and

– to the extent that even where those supplies fall within the purview of renovation and repairing of private dwellings for the purposes of Category (10a) of Annex III to that directive, those supplies include materials which account for a significant part of the value of the services supplied,

the United Kingdom of Great Britain and Northern Ireland has failed to fulfil its obligations under Article 98 of Directive 2006/112, as amended by Directive 2009/47, read together with Annex III to that directive;

2. Orders the United Kingdom of Great Britain and Northern Ireland to pay the costs.


Summary

Reduced VAT rate for renovation and repair of private homes, with the exception of materials that represent a significant part of the value of services provided

By applying a reduced VAT rate to installation services for ‘energy-saving equipment’ and to supplies of such equipment by the person installing this equipment in the home:
– while these services and supplies cannot be regarded as ‘supply, construction, renovation and conversion of housing provided in the context of social policy’ within the meaning of point 10 of Annex III of the VAT Directive;
– whereas those services and supplies do not fall within the scope of ‘renovation and rehabilitation of private housing’ within the meaning of point 10a of Annex III to that directive, and
-whereas the said services and supplies, even when they fall within the scope of renovation and rehabilitation of private housing within the meaning of point 10a of Annex III to that Directive, comprise materials representing a significant part of the value of the services provided ,
the United Kingdom of Great Britain and Northern Ireland has failed to fulfill its obligations under Article 98 of the VAT Directive in conjunction with Annex III thereto.


Source:


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