Households will have to pay hundreds of pounds more to insulate their homes if Britain loses a legal battle over VAT with Brussels.
The row threatens to further undermine the Government’s “Green Deal” energy efficiency programme, which ministers have billed as the biggest home improvement project since the Second World War.
Many energy-saving measures are charged at the lower VAT rate of 5 per cent, covering products such as controls for heating and hot water systems, as well as having solid wall or loft insulation installed.
But the European Commission has ordered the UK to apply the standard higher rate of 20 per cent, claiming that the 5 per cent charge breaches European Union legislation to remove what it sees as tax distortions.
At the higher rate, households would have to pay an extra £1,500 on top of the £10,000 current cost of installing solid wall insulation in an average home. The £1,500 cost of installing cavity wall insulation in the largest homes would cost an extra £225.
The Times has learnt that Oliver Letwin, the Cabinet Office Minister, has written to the European Commission formally ruling out any change in policy, setting the stage for the case to be decided by the European Court of Justice in Luxembourg.
Under the Green Deal, which goes live in January, households will take out loans to install energy efficiency features such as insulation or double glazing. Under its “golden rule”, the savings made from the householder’s energy bill each year are supposed to outweigh the cost of the loan repayments. But with finance providers for the scheme charging commercial rates of interest, there are already doubts that the golden rule will be met for some of the more expensive measures.