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UK VAT cut debate as inflation surges past 10%

UK Prime Minister candidates review VAT cuts: standard rate from 20% to 15%; energy cut from 5% to 0%

Conservative party leadership candidates, and therefore the next Prime Minister of UK, review proposals to cut the reduced VAT rate on domestic energy from 5% to 0%.

‘Nuclear option’ of cut in standard rate to 15%

One of the candidates, Liz Truss, is being reported as considering a cut in the standard VAT rate from 20% to 15%.  This would cost up to £38 billion for one year and could cut inflation by 2%. However, such emergency VAT cuts, such as the Labour 2009 cut from 17.5% to 15% at the height of the financial crisis, have largely been concluded as neutral in effect.

The second candidate, former Chancellor, Rishi Sunak had already committed to a zero’ing of VAT on domestic energy bills.

The proposal comes as average household energy prices are set to rise to £3,549 per annum from the current level of £1,971. It is anticipated to hit £4,000 next Spring.  The UK’s inflation rate reached 10.1% in July 2022, amongst the highest in Europe.

Green VAT and Fuel Duty cuts Spring 2022

The UK Chancellor, Rishi Sunak, delivered his annual Spring Statement. This included a number of indirect tax measures:

  • The supply with  installation of domestic insulation, solar panels and heat pumps (energy saving materials) will be cut from 5% to zero from April 2022 for 5 years. Wind and water turbines will also be included as qualifying technologies. This measure will cost £280 million. However, because of uncertainty on the Northern Ireland Protocol VAT position, this cut will not initially apply there until futher discussion and agreement is reached with the EU. In the meantime, the Northern Ireland Executive will receive a Barnett share of the value of this relief until it can be introduced UK-wide.
  • Fuel Duty will be cut by 5 pence per litre until March 2023. This will cost over £5 billion

Other European cuts on VAT on fuel and foods have been passed or are under review.

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