Social Justice

VAT cut or better benefits? Ministers under pressure to rescue millions from energy crisis

There's cross-party support to cut the five per cent VAT charge on fuel bills to stem the energy crisis, but others say welfare is the answer

energy crisis

VAT is currently applied to domestic fuel bills at a rate of five per cent. Image: CORGI HomePlan/Flickr

Labour MPs and Tory backbenchers want Boris Johnson to cut VAT from energy bills to curb the worsening cost of living crisis – but charities want ministers to boost benefits first.

Energy bills are at the heart of a critical cash emergency for families across the country as  Ofgem is due to raise the energy price cap in April, pushing as many as six million households into fuel poverty, National Energy Action campaigners warned.

Removing the five per cent tax from heating and electricity charges could help to cut average fuel bills by £200 per year, according to the Net Zero Scrutiny group of Conservative MPs.

But only if charges to pay for renewable energy projects are paused too, they said in an open letter to the prime minister pleading for action on the energy crisis.

“We hardly need to point out that high energy prices, whether for domestic heating or for domestic transport, are felt most painfully by the lowest paid,” said MPs including Craig Mackinlay and former work secretary Esther McVey.

The warning came as economists predicted another energy price surge which could take average fuel bills to £2,000 per year in the coming months.

But even annual £200 savings – an estimate far exceeding that calculated by others including Energy UK’s chief executive, who said the cut would reduce bills by £90 – would make up for less than a fifth of what people lost from their incomes when ministers cut universal credit in October.

And it would barely soften the blow of the £1,200 hit to household budgets predicted by the Resolution Foundation for 2022.

“Decades of Conservative failure has left us deeply vulnerable as a country,” said Ed Miliband, shadow climate change secretary and former Labour leader. “What’s more they have made the cost of living crisis worse with decisions to raise taxes on families and to cut universal credit,” he added. 

Nearly six million people lost £1,040 from their incomes overnight when the government reduced basic universal credit payments to pre-Covid levels last year, in the same week that furlough ended and the energy price cap increased.

“The government cannot simply stand by and let families be clobbered by rises in bills of hundreds of pounds,” Miliband said, calling on ministers to remove VAT from energy bills for six months.

Asked about the potential of a VAT cut in a coronavirus press conference, Johnson said he would not “rule out further measures” but highlighted existing programmes to support consumers.

“We will continue to listen to businesses and consumers about how to abate the cost of energy,” he said, “and in the mean time there are all sorts of things we can do to help people. I appreciate the difficulties people are facing because of the increasing gas prices but we’ve got the warm home discount, winter fuel payments and cold weather payments as well as the £500m contribution through local government to help those who need it most.”

Removing VAT from domestic fuel bills was a key pledge of the Vote Leave campaign – which counted Boris Johnson among its most prominent members – during its 2016 Brexit efforts ahead of its referendum win.

Experts have repeatedly warned of increasing numbers of households forced to choose between buying food and heating their homes in the winter months. 

A dramatic 500 per cent surge in global wholesale gas prices in the past year, the UK’s departure from the EU and soaring post-lockdown inflation have all been cited as drivers behind recent eye-watering household energy charges while more than 20 providers have gone bust.

Nearly four million adults could be forced to go without heating in 2022 as a result, according to a Save the Children poll of 2,000 people in the UK.

“Parents we work with tell us that they’re having to choose between heating their homes and buying clothes for their children,” said Dan Paskins, director of UK impact at the charity.

“This pandemic has made it clear that we need a strong social security system to support families when things get tough.

“The previous increase to universal credit was a lifeline for families up and down the country. Reinstating [that] would help families and provide some much-needed relief for those facing hardship in the year ahead.”

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A government spokesperson said ministers were supporting low-income households through the energy crisis by maintaining the price cap as well as “through initiatives such as the £500m household support fund, warm home discount, winter fuel payments and cold weather payments.

“Protecting consumers is our top priority.

“Domestic fuels such as gas and electricity are also already subject to the reduced rate of five per cent of VAT,” they added.

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