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If the Government removes VAT from energy bills, will the cut be passed on to customers?


Are energy firms obliged to pass on any VAT cut on electric and gas bills to fixed-tariff customers?

I am six months into a two-year fixed price energy deal.

There are rumours the Government might remove the 5% VAT  from energy bills to relieve the cost of living crisis.

If this occurs, would my supplier be obliged to pass on the price cut to me – or can they claim a fixed tariff is a fixed tariff and can’t be changed?

There has been rumours that the Government may cut the 5% VAT on domestic energy bills

Grace Gausden, This is Money, replies: Energy prices have been soaring for the past few months thanks to rising wholesale costs, with many seeing their bills go up by hundreds of pounds when leaving their fixed contracts. 

As a result, households are trying to find any way to reduce their outgoings.

One glimmer of hope came in the form of rumours that the Government might remove VAT from energy bills to lower costs.

However, VAT is not 20 per cent on domestic energy bills, as with most products. 

Instead, VAT on fuel bills in the UK is currently charged at 5 per cent – rising back up to 20 per cent for businesses. 

If removed, it could reduce energy costs – but the exact amount will vary from person to person depending on which tariff they are on and how much energy they use.

At present, there is a price cap in place on standard default tariffs – the rates that customers move on to when a fixed term ends and they don’t switch to a new deal. 

This stands at £1,277 for dual fuel customers.

This means many are paying this amount and, of this, the VAT accounts for £63.85.

Therefore, if the reduction is given to customers, technically bills will likely fall to £1,213.15 for the majority. 

But the question is whether the savings would be passed on to consumers or not.

According to Energy Helpline, any VAT cut would have to be passed on, even to fixed deal customers, as the fixed element of the deal is based on the unit rate charged for the energy and the day rate, with the VAT charged on top of that. 

This is good news for many who, if the change goes ahead, could see a fall in their monthly outgoings.  

Whilst it certainly won’t solve the problem of the energy crisis, it could help financially vulnerable families who are struggling to pay their bills.

Experts say that if there is a VAT cut to energy bills, customers should see the reduction in cost

Experts say that if there is a VAT cut to energy bills, customers should see the reduction in cost

Gareth Kloet of Go Compare replies: The VAT rate on energy for domestic customers is 5 per cent – lower than the 20 per cent rate that is applied to other products and services – and is collected on behalf of the Government by the suppliers.

Therefore, any changes to VAT will need to be communicated by the Government and collected by these companies from the effective date.

For customers on a fixed rate tariff, the fixed rate is effectively only on the unit cost per term or KWH that they agreed to pay, plus any standing charges (if applicable) at the time of entering the agreement.

Therefore, if the VAT rate changes, this would be reflected on the customer’s bill regardless of the type of tariff they signed up to.

VAT is calculated on the total amount of energy used in a billing period and added to the bill – and the supplier must pay this on to HMRC. 

Ofgem, the industry regulator, has broken down how the cost of energy bills are made up

Ofgem, the industry regulator, has broken down how the cost of energy bills are made up

Alex Hasty, associate director at Compare the Market, replies: The Government’s intention in any proposed VAT cut on energy bills would clearly be to reduce costs for households ahead of the price cap changes which will push up prices for millions of people. 

However, some questions remain around how such a policy would work in practice and how it would apply to different sorts of tariffs.

Unlike standard variable tariffs, fixed tariffs are not bound by the energy price cap, so it is unclear at the moment whether a cut in VAT would apply to those households currently on fixed rate deals. 

The proposed VAT cut is likely to apply to SVTs as these are the customers who will be hit the hardest when the new cap comes into effect. 

Justina Miltienyte, energy policy expert at Uswitch, replies: With predictions of a near £2,000 price cap on the way, many households could be faced with the stark choice of heating or eating if action is not taken to support them in the coming months.

A 5 per cent VAT cut on energy bills was never going to be enough to offset a predicted 50 per cent price cap increase, but it’s alarming that the Government seemingly scrapped the idea so hastily without an alternative, at a time when consumers are bracing themselves for a catastrophic bill hike.

We repeat our calls on the Government to upscale its targeted support for vulnerable households, in a way that is reflective of the cost increases that consumers will see coming in April.

While the Government continues to rely on the Warm Home Discount as a way to help the most vulnerable, the support is nowhere near enough and the payments should be automatic for all who qualify. Now is the time for the Government to act, and fast.

Grace Gausden, This is Money, adds: Previously, the Government suggested it wouldn’t be removing the VAT on energy bills but it is thought it may now do a U-turn after pressure from the public. 

If so, this should be passed on to consumers which may help ease financial pressures somewhat.

However, if the price cap increases by hundreds, as is expected, the 5 per cent discount will only make a small dent in costs. 

Any customers struggling to keep up with payments should speak to their energy supplier or see if they are eligible to sign up to a scheme such as the Warm Home Discount.  

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