The European Commission has told the Government to amend UK legislation which allows a reduced VAT rate for the supply and installation of energy-saving materials such as insulation.

Brussels believes the current 5% rate levied on these materials is illegal, and if the Government does not change British law within two months, the Commission may refer the matter to the European Court of Justice.

Builders Merchants Federation 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 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 reckon 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”.

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

Amphlett said: “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?”