UK Government To Cut Gas and Electricity VAT To Zero

Will the UK decide to cut taxes on domestic energy? 

UK prime minister Boris Johnson has been questioned about the decision to cut taxes on domestic energy. Back in 2016, he stated that leaving the EU would make ministers ‘able to scrap this unfair and damaging tax’. 

This has come after forecasts of typical household energy bills rising rise by hundreds of pounds in April this year, in addition to the £139 increase back in October. 

Despite promises made before the EU referendum, the prime minister has stated he will not be cutting VAT on fuel bills following the fears of a huge rise in the cost of energy. This comes after promises that Brexit would allow him to make these changes. 

Labour has repeatedly called for a reduction in the tax, however, the prime minister has stated that the UK government is committed to helping people “throughout the pandemic”, providing support such as changes to Universal Credit and the minimum wage rise. 

Meanwhile, the increasing fuel bills have placed fear among many. Thousands of families across the nation could be facing a potential disaster due to upcoming tax rises and rising energy costs. 

What Is The Current VAT On Domestic Fuel Bills? 

In the UK, VAT on domestic fuel bills is currently charged at 5%. This saving does depend on the tariff customers are on, which provider they use as well as how much energy they consume. 

Ofgem, the energy regulator, said that for a typical dual fuel customer, the average annual bill when paid by direct debit on a standard variable tariff is £1,277. When breaking down this bill, VAT stands at £61 a year. 

If you take other policy costs into account, such as the contribution to the government’s environmental and social schemes, they make up £159 of the bill. There have been suggestions by some members of parliament to change this too.  

There are different ways of finding out the best deal for energy. For consumers in the UK, those hit hardest need all the support they can get. This will be even more important after April.  

How Much Would Cutting VAT Save UK Consumers? 

By cutting the VAT on domestic energy, 5% would be taken off the average bill. So, for example, you would save roughly £40 if you spend £800 a year on energy.  

Meanwhile, if we take the estimated price cap usage of £1,277 a year, the average household would save around £63.85. When April comes around, prices are set to soar by over 50 per cent when the new price cap hits, meaning it will be even higher.  

According to HMRC statistics, if the UK government were to scrap the 5% tax, it would cost around £1.7bn. Questions then arise whether this money could be spent in other areas.  

The prime minister will not support the cutting of VAT due to helping people who don’t need the support. During times like these, it is crucial to have access to a broad range of suppliers to ensure you are getting the best deal. 

How Much Does VAT Count Towards The Average Energy Bill? 

With wholesale natural gas at three times higher than the pre-pandemic price, proposals to tackle the issue include cutting VAT on bills for a year, as well as a windfall tax on the North Sea oil and gas producers. But what makes up the average energy bill? 
 

What Ways Do The UK Government Target Fuel Poverty? 

The issue that comes with reducing VAT on energy bills to zero is that when targeting those facing fuel poverty, it doesn’t do a good job. Those with larger homes and higher energy usage would benefit more from this.  

On the other hand, looking at poorer households in the UK, the amount of their income spent each year on energy could rise from 8.5% to 12%, meanwhile, this figure stands at 4% for the richest households. There are some online tools for calculating your energy usage to help save money too.  

Furthermore, by making energy cheaper, there are concerns that the UK will not meet its environmental targets, especially when talking about natural gas. So, what is the UK government doing to help poorer homes? 
 

According to the prime minister, 2.2 million people in the UK have been supported with the Warm Home Discounts, worth £140 per week. Worth £25 a week, Cold Weather Payments have helped four million people and pensioners have been supported by the £300 Winter Fuel Payments.  

What Did The Government Promise About VAT? 

Back when the UK was a member of the EU, at least 5% was required on VAT on domestic energy. When voting to leave the EU, campaigners Boris Johnson and Michael Gove clearly stated VAT would be cut on domestic fuel if the UK were to leave.  

Their promise was simple, lower fuel bills for everyone, stating that “when we Vote Leave, we will be able to scrap this unfair and damaging tax”. 

Later in 2016, Michael Gove said: “I think when we take back control of the millions we give to the European Union, this [scrapping VAT on energy bills] has to be the top priority” in an interview with Sky News. 

Are EU Countries Able To Cut VAT On Domestic Fuel? 

For countries in the EU, there are regulations that allow for a standard rate with a minimum of 15% VAT or a reduced rate with a minimum of 5% VAT. In recent months, some of these countries have begun taking steps to lower fuel prices. 

Even though VAT remained above the minimum levels, payments have been made to those most vulnerable to support people who need it the most during current price rises. 

In Spain, for households with modest energy consumption, there was a decision to temporarily reduce the VAT rate on energy bills from 21% to 10%.  

What Is The Impact On UK Consumers? 

In the UK, it is predicted that families could face a £1,200-a-year rise in energy bills. This comes in April 2022 when a 1.25% increase in National Insurance contributions (NICs) and energy price cap rise comes into effect. 

To add to the crisis, it is estimated that rising inflation, peaking in spring at 0.6% could see real pay levels set to stagnate. Thousands of families could be set to fall into poverty or debt due to the result of inflation. 

What Is Labour’s Response? 

Shadow climate change secretary for Labour, Ed Miliband, has asked for a VAT cut to help all families and £200 in total off bills. But where will this £200 come from? Well, rather than the £61 Ofgem uses, the removal of VAT from bills is taken as being worth £89 for a typical household. 

When Ofgem is looking at April energy bills, they are expecting a considerable rise in prices. However, Labour is predicting a typical bill to increase from £1,277 to £1,865. 

Rather than being paid all at once, taking away a further £94 that would have been added to bills from April, the costs incurred by suppliers going out of business over several years can be spread out. 

What Was Boris Johnson’s VAT Promise During Brexit? 

During the leave campaign, part of the 2016 Brexit referendum, campaigners insisted that to allow Britain to cut the VAT tax, leaving the EU was the best option. Notable backers included Boris Johnson alongside Michael Gove and former Labour MP Gisela Stuart. 

Stating that back “In 1993, VAT on household energy bills was imposed. This makes gas and electricity much more expensive. EU rules mean we cannot take VAT off those bills.” 

Further adding “The least wealthy are hit particularly hard. The poorest households spend three times more of their income on household energy bills than the richest households spend”. 

How Will Energy Bills Be Impacted In April? 

As of April 1st 2022, the new price cap will come into place. There are estimations that for millions across the country, energy bills could soar by more than 50% for those on a standard tariff. 

Energy UK predicts that this rise will see the current £1,277, a record in itself, increase to around £2,000. Martin Lewis, the host of ITV’s The Martin Lewis Money Show, has warned that we may see a “seismic hit for fuel bills which is going to be astronomical” in April.  

He has warned the UK government to act now before it is too late. If you are finding paying your energy bills tough, try checking to see if you can claim for an energy grant or the Warm Home Discount. Also, speak to your energy supplier. 

Your supply won’t be cut off and they may come up with a solution or payment plan to help get you through this period. You could also use these energy-saving tips to help reduce your usage.