Forum Topic

Energy Prices & VAT

There is currently lots of radio discussion and media reporting on the proposed hike in energy prices which is bad news for all of us and something about this is bothering me.  I am old enough to remember the introduction of VAT but I always thought that this tax was originally levied on so called luxury goods and services, or am I wrong? Gas and electricity are not luxuries they are essentials so why are we being charged VAT on their consumption?

Sue Hammond ● 1497d17 Comments

I missed out the word 'advisor' as in financial services advisors.  Those who have little can't afford to use them and often can't consequently avoid the tax that richer people can afford to.

Philippa Bond ● 1495d

In the VAT sense financial services encompasses banking, building society savings, mortgages, insurance, pensions, etc which I think most of us use? VAT isn't paid directly on these services but because these organisations are exempt and can't reclaim input VAT on goods and services they purchase  (such as IT or consultancy) then that is passed on to customers as part of their overheads. That's different to food retailers whose sales are zero rated for food who can reclaim input VAT on, for example, transport services and purchases of refrigeration equipment. (Obviously if food shops sell non food items they charge the appropriate VAT  rate on those goods! But then if banks sold money boxes they'd have to charge VAT on those ...)

Michael Ixer ● 1496d

Who can afford to use financial services?  I doubt it is the people who need the most help and advice on living on a very small budget who will probably also automatically be paying tax PAYE!Of course if your home has good insulation and ventilation you are unlikely to be using so much fuel to heat and cool your home!Why were the fuel companies given the job pf insulating homes - it doesn't make sense.

Philippa Bond ● 1496d

I gather the EU is planning on abolishing it during 2022 also.On the same basis though, why do we pay 20% VAT on toilet paper?

Matt Palmer ● 1496d

I seem to remember the US having local sales tax which varied according to each state.It really doesn't matter what you call it it is a proportional indirect tax and hence will be regressive. In fact grants for adding home car charging etc are only going to the imbalance.Can anyone remember when a UK government had an energy policy??VAT in pounds will go up when the bills go up too. Being reliant on imports doesn't help either.The current government is not solely to blame - an accumulation of this and successive governments, even the short grass is very long!

Ed Robinson ● 1496d

@Matt 20.11Yes Matt and one of the EU's most ridiculous examples was taxing sanitary products.🙄 EU law required members to tax tampons and sanitary towels at 5%, treating period products as non-essential. Rishi Sunak abolished the tax on 1st January 2021.

Sue Hammond ● 1496d

Haven't had time to read this Wiki page but if you look at the map the US seems to be the only country with a significant economy which does not use VAT …https://en.wikipedia.org/wiki/Value-added_tax

Michael Ixer ● 1496d

Had to look at why financial services are exempted from VAT; seems to be that is difficult to assess the value added by these institutions …https://bruegel.org/wp-content/uploads/imported/events/Aujean.pdf

Michael Ixer ● 1496d

The UK swapped from Purchase Tax to Value Added Tax on joining the EU but whether one adds VAT at the points value is added to goods & services, Purchase Tax applied at the manufacturing wholesale stage, or sales tax added at the retail point (as in the US) it's the consumer that picks up the tab? Now the UK has left the EU I guess it has more flexibility in adjusting VAT but I doubt it would abandon VAT as I think it's a system commonly used outside of the EU.

Michael Ixer ● 1496d

Yes. EU and VAT are linked. I remember it as such and have wondered since our departure why it wasn't abandoned and highlighted as part of the Brexit argument. The Wiki article gives details but I haven't read it all. It may give a window into a way to reducing energy costs but I guess tax has to come from somewhere! I've just always resented the concept of the end user picking up the tab though I am pro EU .

Katrina Black ● 1496d

Interesting, I admit I didnt read the wiki article but for some reason I thought we only starting applying VAT on non luxury items as a condition of joining the EU.

Matt Palmer ● 1496d

Given that it was a Conservative government who increased VAT on domestic energy from zero to 8% (in my opinion as part of a strategy to move from direct to indirect taxation) why would anyone think they would reduce it back to zero?

Michael Ixer ● 1496d

I'd say it was naive of them to make that statement and of anyone to believe it. Aside from the taxation issue the UK has no control over oil and gas prices on the world's markets. Perhaps if we were self sufficient in wind, solar and heat pump sources ... in 2040?

Michael Ixer ● 1496d

Sue. Your comments got me Googling because I had some faint recollection of that but it was all a bit hazy! Looking at the Wiki article below the idea of taxing goods and services by their luxuriousness goods back to VAT's predecessor, the Purchase Tax. When VAT was first introduced by a Conservative government most goods and services had VAT applied - only a few such as banking were exempt from VAT - with a general rate of 10% except for a few items such as children's clothing and most foods that were zero rated. The idea of luxury items with a higher tax rate was introduced by Labour governments in the 1970s. Domestic fuel originally had a VAT rate of zero but the Conservative government raised the rate on domestic fuel from zero to 8% in 1993, subsequently reduced to 5% by Labour in 1997. In my personal opinion Conservative governments have gradually shifted from direct income taxation to indirect VAT. I don't think it was ever stated that VAT was only to e applied to luxury goods and services but essentials such as food, children's clothes and domestic fuels have usually had zero or lower VAT rates - but I think that's more a political rather than a general intention? (I should probably know but I'm not sure why some services such as finance we're exempted. Just another complexity for those if us designing and implementing IT systems!) Full story below: https://en.wikipedia.org/wiki/Value-added_tax_in_the_United_Kingdom

Michael Ixer ● 1496d

It seems so Matt. 😡 I assumed VAT would be removed post Brexit and I suppose many others did as well and think there will be trouble now that these services are so prominent in the news. However my point is that these are essential utilities and should never have been taxed in this way anyway.

Sue Hammond ● 1497d

Guess they just forgot?

Matt Palmer ● 1497d

"Boris Johnson and Michael Gove today claimed that the government would be able to scrap VAT on household energy bills if Britain leaves the EU.Having previously pledged to spend Britain’s annual EU contribution on "our priorities" like the NHS, Vote Leave campaigners today argued that leaving the EU will allow ministers to bin the "unfair and damaging" £2 billion a year tax on gas and electricity prices.Writing in the Sun, Mr Gove and Mr Johnson promised that "fuel bills will be lower for everyone"."

Matt Palmer ● 1497d