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Consumers’ pain is the Chancellor’s gain

The average household energy bill has more than doubled over the last eight years. If you ask who have been the beneficiaries of these amazing price hikes, most people would respond: the Big Six energy companies.

Conveniently forgotten is somebody else who gains each time fuel bills go up. That person is the Chancellor of the Exchequer.

Because built into every fuel bill is a 5% surcharge. It is called Value Added Tax. Each time prices rise, so does the Treasury’s revenue. This year VAT receipts from fuel bills are set to top £2bn, well over twice the amount raised in 2004/5.

For most businesses, VAT is simply a pass through, reclaimable, cost. So adding to the amount of VAT raised is purely an administrative (and possibly a cashflow) matter. All registered businesses can, and do, simply reclaim any amounts charged.

But that is not the position for householders. Because we are effectively the “final consumer”, we can never reclaim VAT. And VAT is the only obligatory tax required from all Member States of the European Union.

Governments have always been free not to charge VAT on certain items. But once VAT is introduced upon any given item, the rules say it can never be removed- or indeed reduced below a minimum 5%.

That is why, for the initial twenty years of the UK’s membership of the EU, no government sought to levy VAT on domestic fuel. When in 1993, the Major government did introduce VAT (at the eccentric rate of 7.5%), it instantly became a genuinely divisive political issue. Consequently when Labour won the 1997 election, one of the first moves was to reduce VAT on energy consumption to 5%- the rate currently charged.

Recognising the idiocy of charging VAT on energy consumption at 5% but energy conservation at full rate (now 20%), the Labour government did take partial steps to rectify that absurd distortion. A curiously eclectic list of energy saving products (microgeneration, thermostatic radiator valves, insulation installed by contractors) currently can be charged at that 5% rate too – a lower rate now being challenged by the European Commission as illegal.

Should the European Commission succeed, the clamour – at least on ecological grounds – to raise the VAT rate on energy consumption up to the full rate of 20% will be significant. And will probably be covertly encouraged by those whose job it is to maximize government revenue.

Tactically that might not be too smart a move. To date nobody much (apart from me) seems to have noticed quite what a nice little earner the 5% VAT rate on energy consumption has been for the Chancellor. Bringing in £2 bn a year is not peanuts. Quadrupling that to £8bn a year would undoubtedly attract attention.

What is so galling is that this windfall revenue to the Chancellor coincides with the decision, after more than 30 years, to remove all taxpayer funding to improve the homes of those in England in fuel poverty. (Not true in any of the devolved nations, where budgets are increasing). Two years ago the Government was funding the Warm Front programme at around £400 million a year. And still the scheme was heavily oversubscribed.

It is not as if the numbers in fuel poverty are diminishing. Far from it. The number of such struggling households continues to climb. Despite the statutory commitment to eliminate fuel poverty by 2016, the number of households still suffering has tripled since 2004/5, to well over 6 million. The campaign group Which? maintains that soaring fuel bills are the main worry raised by its members.

To try to improve the lamentable housing stock of the fuel poor, the Government is relying in England entirely upon the energy companies to fund such improvements. They are doing so under the Energy Company Obligation, itself raised from – guess what – a levy on consumer’s fuel bills – thereby exacerbating problems for the fuel poor.

Even the most optimistic observers reckon that this scheme will lift no more than 6% of relevant households out of fuel poverty. The question remains: what of the other 94%?

Subsidy programmes on fuel prices are helping some. But such programmes alleviate, they do not solve the problem. Only capital expenditure upgrading leaky homes once and for all can do that. Otherwise, as former Prime Minister Tony Blair so evocatively says, “it is like trying to fill a bath with hot water without putting the bathplug in.”

No question there are rich political rewards for the political party that really does deliver on improving the energy performance of the housing stock, particularly for less affluent pensioners. There is no doubt in my mind how to fund this.

The 5% VAT on household electricity and gas bills has effectively become another stealth tax. Add to that the revenues due from the EU emissions trading scheme, and from the carbon tax starting this April, you are talking about revenues from fuel taxation of over £5bn each year.

The government is rushing to shield the largest energy consuming companies from such price hikes. The very least the Chancellor should be doing is returning some of these gains, to help those in fuel poverty cut out the draughts.

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    The worrying thing is that ed balls had in the past suggested raising the 5 % to a higher level – presumably that would now be 20%!!

    I used to work on the water industry and in one price review an economist from a major consultancy argued that water is price elastic. Raise price and consumption goes down; true to a point. There is a reservation level of demand where household cannot consume less. The same applied to gas and electricity. 20% vat may reduce demand in the short run but over time it will go back to normal levels and only the HMT benefit .

    With all the environmental taxes on energy there is little point ( except for C oE) on having vat!


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