A European Directive that wants to end the reduced 5% VAT rate on energy-saving products could scupper the Green Deal, warns the Builders' Merchants Federation.

The European Commission in Brussels has told the government that the 5% VAT rate for the supply and installation of energy-saving materials such as insulation is illegal and that, if the law is not changed within two months, the Commission may refer the matter to the European Court of Justice.

BMF Policy Manager, Brett Amphlett, said: “At a time when the BMF has been urging the Coalition government to extend the 5% VAT rate to all Green Deal projects, the European Commission’s move could be disastrous.

"Any increase in the cost of materials will affect the Golden Rule calculation. The ruling will have major implications for the Green Deal if the government is forced to increase VAT on insulation, central heating and hot water system controls, heat pumps and solar PV and thermal panels to the 20% standard rate.”

The BMF has long held the view that it is wrong to apply 5% VAT on energy consumption but 20% VAT for energy conservation. It believes the 5% rate should apply to both.

Amphlett said: “The BMF wrote to Treasury Ministers back in March outlining the compelling case to review current VAT rules and rates. Existing arrangements are complex, confusing and do not favour green improvements. We believe most SME builders do not know how these apply at present – and it is unlikely their customers do either. But these are the very same people the government wants to adopt the Green Deal when it comes into force in 80 days’ time.”

BMF is concerned that, with Parliament due to break for the Summer Recess next week, the VAT change demanded by Brussels may go through on the nod.

“Sadly it seems that bishops and bakers have the clout to force the Government to concede on its VAT plans for alterations to churches and historic buildings, and sales of hot pasties and static caravans. Yet the building trade faces the prospect of the Chancellor removing a lower rate that already exists for some energy-saving measures just before the introduction of a flagship policy to improve the energy-efficiency of our homes and workplaces. How crazy is that?”

The BMF is the UK trade association representing builders', plumbers', heating, and timber merchants and their suppliers. Members sell construction materials, home improvement products and renewable energy systems.