UK scraps electricity VAT, leaving businesses and gas users exposed

Great Britain will remove the 5% VAT on electricity bills from October 1, coinciding with the introduction of the new Ofgem price cap. The government estimates the measure will effectively reduce the annual price cap by £45 for a typical household, with the relief applying to both standard and fixed-rate tariffs. Northern Ireland will retain the 5% rate due to post-Brexit EU rules, though Stormont will receive compensatory funding.

The tax break will not apply to most commercial operations, restricted largely to small businesses and charities. Industry leaders have warned that excluding the broader corporate sector does little to stem the economic contagion of elevated energy costs, which continue to inflate the price of everyday goods.

The policy design is already drawing scrutiny from economists over its targeting. The Institute for Fiscal Studies notes that since the start of the Iran war, gas prices have surged 24% compared to a 5% rise in electricity. “If the goal of today’s policy is to help households that have lost out as a result of the war, it is not well targeted at achieving that aim,” the thinktank said.

Because the tax is applied to total consumption, higher-income households will capture a disproportionate share of the cash savings despite allocating a smaller percentage of their overall spending to power. The bottom 10% of earners devote 5% of their spending to electricity, versus 2% for the top 10%. Adam Scorer, chief executive of National Energy Action, noted the cut “will be less useful for the huge majority of low-income households who heat their homes with gas and cannot afford the upfront cost of shifting to solar, batteries and heat pumps.”

The measure does, however, function as a direct subsidy for the green transition. Camilla Born, head of Electrify Britain, said: “By choosing to take VAT off electricity only – rather than gas – it appears that Burnham has finally gotten the memo that the priority is to get Britain using our homegrown clean power. Until we shift to electric heating, driving and manufacturing we will remain exposed to fossil fuel prices.” Households with electric vehicles and heat pumps will see the most substantial bill reductions.

Underlying the tax relief is a deepening debt crisis that the policy does not resolve. Energy UK reports that household arrears to suppliers have hit a record £5.5 billion. Steve Vaid, chief executive of the Money Advice Trust, urged the government to implement an Ofgem-consulted debt relief scheme: “Ministers should move ahead with the scheme now to provide urgent respite for people who’ve built up energy debts through no fault of their own.”

Market attention is now shifting to the chancellor's November budget for a more permanent fix. Andrew Sissons, a director at the thinktank Nesta, said the upcoming budget “would be the right opportunity for the new chancellor to set out a wider and more long-term set of reforms to reduce electricity costs.” Nesta has proposed a £3.2bn annual taxpayer-funded plan to alter gas charging and strip policy levies from bills, which would save households an average of £130 a year.