The red tape challenge to the Government’s ambitious retrofit agenda

19 April, 2022

There has been a deluge of policy and guidance in the UK creating a whole raft of rules and regulations aimed at facilitating the Government’s ambitious net-zero agenda. In particular there is momentum growing in favour of policies and funding initiatives to support the retrofit of existing building stock.

The question is whether the UK’s current legislative and regulatory framework is fit for purpose in the context of the UK’s ambitious green retrofit and de-carbonisation strategy?

This article looks at three specific areas where the current measures are arguably not fit for purpose when looking at retrofit in the context of the Government’s green agenda.

VAT: Demolition and new building work have always been exempt for VAT purposes. Retrofit and repair work have historically attracted the standard rate of 20% (with a reduced rate of 5% available for qualifying energy-saving materials (ESM)). This discrepancy has incentivised the demolition and replacement of existing buildings and has done little to assist the Government’s highly sought after retrofit revolution. It is for this reason that industry bodies and select committees have long called for the lowering of the rate for retrofit and repair works and hopes were raised that changes would be announced in the 2021 budget but these did not come to fruition.

Against a background of rising energy bills and soaring energy prices, the Chancellor announced in the Spring Statement that VAT on retrofit work will be cut to 0% from 1 April 2022 for home sustainability energy solutions such as heat pumps, insulation and solar panels. The zero-rate, implemented under The Value Added Tax (Installation of Energy-Saving Materials) Order 2022, will be available for a period of 5 years and will then revert to the 5% reduced rate of VAT. This measure will positively impact individuals through lower prices charged by ESM installers subject of course to those businesses passing the VAT savings to their customers. 

The question however remains as to whether the Government should have gone further. Many argue that whilst the zero-rate for specific home sustainability energy solutions is a welcome step, more radical action is required. Cutting VAT on all home improvements would have had a more meaningful impact, financially incentivising home owners to modernise their homes whilst also alleviating reliance on carbon intensive energy systems.

MEES: It is no secret that the current energy rating system in the UK is not fit for purpose. The current system is based on the cost of energy used in heating and powering a property, not on the actual carbon emitted into the atmosphere and therefore gives no indication of how a building is actually used.

The ultimate irony however is that in some cases adopting energy saving measures can make properties appear less energy efficient and result in poorer ratings. The installation of a heat pump is a case in point. The heat pump transfers thermal energy into a property from the ground or air and produces less Co2 than burning gas. They are however expensive to run and can result in the downgrading of a property’s EPC rating.

The Government’s Boiler Upgrade Scheme launched on 1 April is designed to help home owners make the switch to low carbon by contributing towards the installation costs of a heat pump but it is likely that there will be some degree of reticence to participate in the scheme if there is a risk of the property’s EPC score being affected.

It therefore comes as welcome news that following it’s consultation on minimum energy efficiency standards which concluded in June 2021, the Government will shortly be publishing details of a new operational energy rating system for commercial buildings which could ultimately be rolled out and replace the EPC based system. Little is currently known but it is thought that the new system will focus on real-life as opposed to theoretical energy use and is likely to align with existing operational-focused systems such as BREEAM.

Planning and Building Regulations: The widespread shift from demolishing buildings to retrofitting them requires urgent changes to both planning and building regulations. The UK’s planning and regulatory framework is complicated, inconsistent and ambiguous. This is compounded by the fact that the planning authorities are underfunded and understaffed.

Whilst certain changes are permitted without needing planning permission, known as “Permitted Development Rights” any change that materially alters the external character and appearance of a building will most likely need planning permission so works such as fitting an external solid wall insulation would likely change the appearance of a building and therefore require permission. Of course if a building is listed then the majority of changes to the inside and outside of the building will require Listed Building Consent.

The complexity and uncertainty embedded in the process of applying for, obtaining consent and carrying out retrofit works acts not only as a significant logistical barrier but also means that retrofit does not end up being the easiest or most cost effective path to creating future proofed buildings.

Conclusion

The bottom line is that if the Government wishes to keep retrofit at the heart of its green agenda going forward it needs to ensure that its legislative framework across the board from fiscal policy to planning and building regulations are aligned and reflect the practical and financial challenges for stakeholders of retrofitting building stock at scale.

The VAT announcements in the Spring Statement and the discussions around a new operational energy rating system are clearly steps in the right direction. However, these are only small steps and the longer we take to retrofit our existing building stock, the harder that task becomes. Giant leaps are therefore required and none so urgently than in the reform of planning policy. With indications that the Government’s planning reforms will be delayed even further amid rumours that the Government will not now proceed with the planning bill it seems likely planning and building regulations will remain a thorn in the side of retrofit projects at least in the short to medium term.

For the time being it seems that red tape is a challenge that stakeholders must face when looking at implementing environmental, social and governance criteria as a way to enhance growth, brand and market perception and to drive performance.