HMRC confirm that damp proofing products are to be standard-rated

HM Revenue and Customs ("HMRC") has issued a new brief (09/2018) which clarifies that damp proof products are standard-rated for VAT purposes. 

HMRC has become aware that some businesses are marketing damp-proofing products as energy saving and applying zero-rated VAT. Businesses have relied on the first-tier tribunal ruling Safeguard Europe Ltd v Revenue and Customs Commissioners where a gel creating a thick waterproof zone was considered an energy saving material for the purposes of the Value Added Tax Act 1994 Sch.7A Pt II Group 2 Note 1 and therefore, supplies of that product qualified for the reduced rate of VAT.

HMRC disagrees and states in Revenue and Customs Brief 9/2018 that it does not regard damp proofing products as energy saving materials including paints, creams, or gels. As a result, from 1st September 2018, businesses must account for standard rate VAT on sales and applications of these products. HMRC have stated several reasons why they do not qualify:

• Their dominant purpose is to waterproof exterior walls rather improve thermal efficiency
• There is no conclusive evidence that they improve the thermal efficiency of the brickwork.
• The products are not normally described as insulators
• The products are sold as water and damp proofing products, not insulators
• The legislation refers to energy saving materials being ‘installed.’ Gels paints and creams are ‘applied.’

Aspire Comment

HMRC is giving businesses until 1st September 2019 to get their house in order on this VAT treatment. It seems strange that it has taken 5 years following publication of the Safeguard Europe case for HMRC to issue their clarification. HMRC can ignore first-tier tribunal rulings as they are not legally binding and so, in their opinion, the case does not set any precedent. If a case was appealed and heard at the upper tribunal the decision would be legally binding.