Would Brexit mean cheaper fuel bills for Brits? That’s the claim made by Boris Johnson and Michael Gove today, who say that leaving the EU would let ministers get rid of VAT on gas and electricity. With all the bunkum being banded around over the referendum, it’s fair to say that the Brexit campaign do partly have a point on this. Under EU law, the UK is not allowed to charge less than five per cent VAT on fuel and power supplies. Boris argues as much in The Sun today: ‘Fuel bills will be lower for everyone,’ he says.
So it seems that leaving the EU would hand back an element of control on this point, with no European Union country having complete freedom to set its VAT rates. Consequently, ever since 1994, domestic supplies of fuel and power have been liable for VAT under EU law. On this point, however, it’s worth asking why this tax was brought in in the first place. Was it Brussels bureacrats meddling? Did the EU force us to start taxing household bills? In fact, the truth is that it was the Tory government of the day who decided, entirely without any compulsion, to impose VAT on household bills. As this Parliamentary research paper from 1997 explains:
‘It should be emphasised that the decision to end the zero-rating of these supplies was the Government’s alone; the UK was not forced to take this step under EC VAT law as some have thought.’
What’s more, whilst these bills were eligible for a reduced VAT rate, the Conservative government actually wanted to keep tax on these supplies at the (then) standard rate of 17.5 per cent and it was only a defeat on a budget resolution which prevented this. For several years, VAT on such fuels remained at eight per cent. And it took Gordon Brown to bring in a cut in 1997 to bring in the current reduced rate of five per cent. So Boris might have a point about lowering fuel bills through getting rid of this tax. But he is also ignoring his own party’s history in doing so.
Boris also makes the point that getting rid of this tax on household fuel would help poorer people. Again, it’s a valid thing to say, but it ignores the basic idea about why the tax was levied in the first place.
Here’s what Norman Lamont had to say when he justified the tax’s introduction:
‘I have one further measure to propose that will not only encourage greater energy efficiency in every household in the country, but will also raise a considerable amount of revenue for the Exchequer over the years ahead. Fuel and energy supplies to industry pay VAT in Britain. Those to the home do not. In this respect, we are unique in the European Community. I therefore propose, over the next two years, to end the zero rate of VAT on domestic fuel and power. For the first time, the rate of VAT on domestic fuel and power will be the same as that charged on goods like loft insulation material, which improve energy efficiency. This will bring to an end the current anomaly, which makes nonsense of any attempt to use the tax system to improve the environment.’
Lamont went on to say that the introduction of the tax ensured that Britain was two thirds of the way to meeting its target under the UN climate change agreement signed in Rio in 1992. This shows, then, that this tax isn’t a case of the EU bossing Britain around, but was instead meant as a legitimate means of meeting environmental targets. It’s also, as Lamont admitted, a way of raising a lot of money for the Exchequer. And any future government which introduced the measure Boris is proposing would find it difficult to plug such a substantial gap.
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