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VAT Cut On Energy Bills Wrong Instrument To Relieve Fuel Crisis Or A Welcome Relief For The Public

Image by Mohamed Hassan

With reports today that the Chancellor is considering a reduction in VAT on household energy bills in his autumn budget on 27 October, Sue Rathmell, partner at MHA, says it would be more environmentally friendly to use targeted subsidies than a general tax cut to help those in distress and a permanent VAT cut for the travel and hospitality sector would be a better move:

“On balance cutting VAT on energy bills is not the right approach. Although the recent significant increase in domestic fuel bills is a real burden to many, with 50% or more increases in bills, this would be best dealt with by targeted subsidies rather than a VAT rate cut. The latter will inevitably provide more financial help to richer people with bigger houses and cost the Treasury a sizeable amount.

“In addition, if the Chancellor cuts VAT on energy, then it is a bad message to send to the world’s leaders who will soon be arriving in the UK for COP26. We need policies that will reduce energy use not encourage it.

“Finally, there are other possibly more worthy recipients of a VAT decrease, including the tourism and hospitality industry. The sector benefitted from a reduction in VAT over the last 15 months but is now seeing that advantage eroded, with the imposition of a rate of 12.5% from 1 October 2021 and the return to 20% from 1 April 2022. Lower VAT costs for hotels, restaurant and tourist centres encourage people to holiday in their own country instead of going abroad, boosting income across the whole nation and cutting down emissions from air travel.”

Andy Mayer, Chief Operating Officer at free market think tank the Institute of Economic Affairs, said:

"This is smart politics by the Chancellor. As the cost of living and specifically energy prices rise, all tax cuts are welcome relief for the public.

"Even more welcome would be a general review of the social and environmental charges layered on energy bills by successive governments – and their rapid reduction.

"Otherwise the benefit of this change will be entirely invisible."