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UK considers cut on domestic energy reduced VAT rate from 5% to 0%

VAT cut may be announced prior to 7 Feb price cap rise

The UK government is coming under pressure to cut the reduced VAT rate on domestic fuel from 5% to zero as inflation hits a 30-year high. Any change is likely to be announced prior to the rise in electricity capped pricing, due on 7 February 2022.

Chancellor had ruled out VAT subsidy in October as blunt intstrument

The UK’s Chancellor, Rishi Sunak, previously ruled out moving the existing 5% reduced VAT rate on domestic gas and electricity to zero-rated. This would cost around 1.5b billion per annum. Sign-up for our regular FREE global VAT and GST news updates.

Whilst politically attractive, cuts to VAT rates give untargeted subsidies to all consumers, including the better off. They are therefore not effective at giving support to the most needy. They also encourage other worthy groups seeking tax subsidies for their causes which will be unwelcome for the government seeking to close the budget deficit following the huge spending during the COVID-19 crisis.

A blanket rate cut to all energy supplies, including fossil fuels coal and oil, would also not send a positive message in the run-up to the Glasgow-hosted 2021 United Nations Climate Change Conference, also known as COP26.

Any cut follows the spike in global energy prices, and closing of a number of small UK energy providers. With the UK’s departure from the European Union in 2020, it no longer has to abide by the tight EU rules restricting reduced VAT rates. This includes not being allowed to cut energy VAT rates below the lower VAT rate – 5% in the UK’s case.

Spain has already reduced its energy Value Added Tax rate on electricity from the standard rate of 21% to the reduced rate of 10% from 1 January 2022. Italy is planning to do this same.  The European Commission has put together a ‘tool kit’ of suggested measures, including energy VAT rate cuts, for member states to consider during the ongoing energy crisis.

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