Retailers call for VAT on green goods to be cut

VAT should be removed entirely from energy-efficient household appliances and a car industry-style scrappage scheme introduced to encourage upgrades to greener products, the British Retail Consortium (BRC) said today.

The retail lobby group called on the chancellor to revisit prime minister Gordon Brown's high-profile proposals for a cut in VAT on green goods, which were set out in 2007 only to be subsequently sidelined by the government.

In a letter to Alistair Darling, the BRC said "a clear signal should be given to households of the benefits of a switch to the most energy-efficient products".

It added that incentives should include zero VAT ratings for the most energy-efficient products and the introduction of "time-limited scrappage schemes for those buying 'Energy Saving Recommended' products".

Household appliances are responsible for a quarter of all energy use in the home and households are responsible for more than 15 per cent of all UK greenhouse gas emissions, according to figures from the Department for Business Innovation and Skills.

Economic modelling for the BRC by the Centre for Economics and Business Research shows that CO2 emissions could be reduced by 1.3 million tonnes each year – almost one per cent of domestic emissions – by 2020 if VAT were removed from today's most energy-efficient equipment.

The BRC added that even deeper cuts could be achieved as any move to scrap VAT for green products would encourage manufacturers to further improve the energy efficiency of products as they compete to attain the "Energy Saving Recommended" performance standard that would qualify them for zero VAT.

The lobby group said the changes would cost the government £507m per year in lost VAT receipts, but it added that this was equal to the cost of a little more than two weeks of the across-the-board VAT reduction that was introduced last December.

Stephen Robertson, British Retail Consortium director general, said the government was guilty of "working against its own objectives when it sets targets for reducing carbon emissions while charging full VAT on the efficient products that will move us towards those targets".

In his last budget as chancellor in 2007, Gordon Brown said he would write to the European Commission and EU member states urging them to cut VAT rates on the most energy-efficient electrical goods to just five per cent.

Last year, the House of Lords Science and Technology Committee warned that the plans had stalled and urged further action, arguing that the introduction of lower VAT rates for greener goods would encourage consumers to make more responsible purchasing decisions.

However, the government said that under EU trade rules it was unable to axe VAT on specific products without the agreement of all member states. Despite support from a number of states, the EU Commission has so far failed to secure the required backing for the proposals and as a result, energy-efficient products are still subject to the full standard VAT rate, which is due to return to 17.5 per cent from 1 January 2010.

The Treasury declined to comment on how efforts were progressing to gain agreement on an EU-wide VAT cut for efficient appliances.