Not all contractors seem aware of this in my experience. A heat pump installation project should qualify for 5% VAT, including the cost of enabling building works, provided that material costs do not exceed 60% of the total project cost. If materials are greater than 60%, you still get 5% on the labour only. If you’re over 60 or on certain benefits, this 60% test doesn’t apply, and you qualify for 5% whatever.
If you’re using several contractors as well as your heating engineer (e.g. digger driver to dig trenches for the ground source piping, or a builder to alter a room to accommodate the heat pump), speak to your heating engineer about acting as main contractor. The other contractors will invoice at 20% VAT to your heating engineer who will then bill that work on to you at only 5%. This obviously involves admin and temporary cashflow costs for the heating engineer so expect a small charge to cover it – e.g. 2.5% commission.
The same 5% VAT rules also apply if you’re doing work that is primarily designed to improve the insulation of your house.
VAT notice 708/6 – link