0% VAT on air source heat pumps: a warm relief for UK charities – but for how long?

The UK’s commitment to achieving net zero emissions has spurred some welcome financial incentives, including a 0% VAT rate on certain energy-efficient heating installations. This presents a significant opportunity for UK charities, often facing tight budgets, particularly for those considering air-to-air source heat pumps. However, recent government signals have introduced a degree of uncertainty about the long-term future of this benefit.

What's changed (and what might change)?

Previously, the installation of energy-saving materials (ESMs), including heat pumps, was subject to a reduced VAT rate of 5% in Great Britain (Northern Ireland had slightly different rules). From April 2022, a temporary 0% VAT rate was introduced for the installation of specific ESMs in residential accommodations and buildings used solely for a relevant charitable purpose. This zero-rating is currently scheduled to last until 31 March 2027. (Source: HMRC VAT Notice 708/6: Energy-Saving materials).

However, this is a temporary measure. The government has included provisions to review and potentially alter or withdraw the relief. While no firm decision has been announced, concerns have been raised within the industry and by energy policy experts that the 0% VAT rate could be reduced or eliminated before 2027, potentially as part of broader fiscal adjustments. This uncertainty makes it vital for charities to act swiftly if they wish to take full advantage of the current benefit.

Air-to-air source heat pumps: a smart choice

Air-to-air source heat pumps remain a strong option for many charities, offering several advantages:

• High efficiency – they extract heat from the outside air, providing efficient heating even in lower temperatures, and can also provide cooling.
• Lower running costs – due to their efficiency, running costs are lower than traditional gas boilers.
• Reduced carbon footprint – they rely on renewable energy from the air, reducing reliance on fossil fuels.
• Relatively simple installation – air-to-air systems are generally easier to install compared to ground source heat pumps.
• Versatility – suitable for a range of building types.

Why is the 0% VAT rate (currently) so beneficial for charities?
Unlike many businesses, charities typically cannot reclaim VAT on their purchases. (Source: Charity Tax Group – VAT). This means that the previous 5% VAT was a direct, irrecoverable cost. The 0% rate eliminates this financial burden, making heat pump installation significantly more affordable.

Key benefits include

• Direct cost savings – immediate reductions in upfront costs.
• Long-term financial relief – lower running costs mean lower energy bills.
• Enhanced fundraising appeal – demonstrating environmental commitment can attract donors.
• Improved comfort and wellbeing – a comfortable building benefits staff, volunteers, and visitors.

Eligibility and key considerations

To qualify for the 0% VAT rate while it lasts, charities must ensure:

• Charitable purpose – the building must be used solely for a relevant charitable purpose (non-residential) and directly related to the charity's objectives. (Source: HMRC VAT Notice 708/6, Section 2.3).
• Qualifying ESM – the system must be a qualifying energy-saving material, which includes air-to-air heat pumps. (Source: HMRC VAT Notice 708/6, Section 2.2).
• VAT-registered supplier – the installation must be carried out by a VAT-registered installer who understands the 0% VAT scheme. Only a VAT-registered supplier can correctly apply the 0% rate.
• Record keeping – maintain all paperwork and invoices as evidence in case of audits.
• Monitor government announcements – stay updated on potential changes to the 0% VAT rate by checking the HMRC website and industry publications.

The uncertainty factor: a call to action

While the 0% VAT rate offers a significant opportunity, the lack of long-term commitment from the government introduces an element of risk. Charities considering air source heat pump installations should take proactive steps to secure their savings.

Key actions to take now

• Act promptly – the sooner the installation is completed, the more likely the charity is to benefit from the full 0% VAT rate.
• Factor in potential changes – when budgeting, consider the possibility that the VAT rate could revert to 5% (or another rate) before the project is finalised. Build some contingency into financial plans.
• Get professional advice – consult with heating engineers, installers, and tax advisors who are up to date with the latest VAT regulations and government announcements.
• Check eligibility – confirm that the charity qualifies for the 0% VAT rate based on current rules.
• Plan for the future – consider long-term energy needs and ensure the investment aligns with sustainability goals.

Conclusion: a time-limited opportunity

The 0% VAT rate on air-to-air source heat pump installations is a valuable financial incentive for UK charities. It presents a chance to reduce carbon footprints, lower operating costs, and improve building environments. However, the temporary nature of the relief and the possibility of future changes mean that charities need to act decisively and plan carefully to maximise the benefits.

The clock is ticking, and the future of this generous VAT break remains uncertain. Taking action now ensures that charities can take full advantage of this unique opportunity before any potential policy changes occur.