Energy Crisis Prompts Calls for U.K. to Reduce Tax on Bills

(Bloomberg) -- The U.K. is under pressure to join other European governments in mitigating more of the impact of soaring energy prices on the poorest households by reviewing taxation on bills. 

Higher energy costs could boost tax revenue by 180 million pounds ($240 million) this winter with another windfall in April, according to Electricite de France SA and an energy charity. It’s based on higher prices for 15 million customers on default tariffs and the extra value-added tax they pay. 

That’s a fraction of the cost the country is facing after wholesale power and gas prices surged to record levels, but consumer protection groups are calling on ministers to look at how to curb the increase in bills. Investec Plc estimates they will rise by a combined 18 billion pounds next year. 

The situation has been exacerbated by the collapse of two-dozen smaller energy suppliers, with their customers being transferred to other companies and the cost being spread across the industry. 

A cap on the amount companies can charge customers on so-called standard variable tariffs rose more than 10% in October and is set to jump by more in April. At that point, one in every 8 pounds will be spent on energy in Britain by the poorest households, according to Philippe Commaret, managing director for customers at EDF. 

He suggested that the government could cut VAT on energy bills and provide a rebate for 2.2 million households on lower incomes or pensions. “We are calling for the government also to step in and to take action as has been done elsewhere across Europe,” said Commaret.

Of the European Union’s 27 members, 20 have acted to soften the blow for the most vulnerable consumers and households -- most effectively via tax cuts, according to the European Commission. 

The U.K. government is looking at ways to mitigate the increase in bills, including options proposed by the industry to spread price rises over a longer period, cut VAT and expand what’s known as the warm-homes discount, according to a person familiar with the matter. 

A spokesperson earlier said it didn’t recognize the estimates for the rise in VAT from energy bills and that receipts this year are forecast to be below pre-pandemic levels. It’s supporting vulnerable people through subsidy programs and keeping the price cap. 

“Higher energy prices reduce overall VAT revenues, because people spend more on energy, where VAT is 5%, and less on goods and services that have on average a much higher VAT rate,” a government spokesperson said in a response to questions.

But fuel poverty charity National Energy Action said it’s “highly questionable” whether lower income households would otherwise be spending money on non-essentials that incur a higher VAT tax rate. From April, VAT receipts from energy bills could jump by a further 400 million pounds, it estimated.

About 3.2 million households in Britain are in fuel poverty, according to government figures. A doubling in the cost of heating a home in 18 months means that the current government help is insufficient, said Peter Smith, director of policy and advocacy at NEA. 

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