The government’s green agenda suffered a setback this week after an energy-efficiency agency was slapped with a £5.3m tax bill, forcing it to restrict its activities.

The Energy Saving Trust (EST) has been ordered by HM Revenue & Customs to pay £5.3m a year in VAT on its public funding.

The EST runs energy-efficiency programmes on behalf of the government. It also works with the construction industry to give guidance on sustainable energy in homes, and sets energy efficiency standards for housebuilders.

The ruling will affect the amount of money and support that the trust can give to councils, and will mean it is no longer be able to fund local sustainable energy projects – a key element in the government’s battle against climate change.

The news will affect the government’s plan to produce 20% of the UK’s electricity from renewable sources by 2020. In 2005-06, the trust saved 330,900 tonnes of carbon – equivalent to the emissions from 200,000 homes.

Tim Curtis, the trust’s director of operations, said the £5.3m would have been used to cut 1 million tonnes of carbon. “It’s a real setback to the sustainability agenda. We have appealed to Revenue & Customs but haven’t heard anything since May. We’ll have to cancel or postpone several programmes. If the appeal is not upheld, we will have to start a formal consultation process on compulsory redundancies.”

The programmes likely to close include the offering of money and advice to councils and the investigation of technologies for low-carbon homes.

HM Revenue & Customs declined to comment.

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