Two simple tax changes, which should be adopted simultaneously, would reduce household electricity bills and encourage people to move away from fossil fuels, as well as helping the UK do its part to tackle the climate emergency. So what are they and how would they work?
The first relates to domestic electricity generated from renewable sources. At present, there’s no incentive for domestic consumers to change from fossil to renewable sources: in whatever way it’s generated, electricity used by domestic users suffers VAT at 5 per cent. But what if zero-rate VAT applied to electricity from renewable sources? That would be a worthwhile incentive for consumers to shift away from fossil fuels. This VAT cut would be easy to introduce after Brexit and may even be possible under EU rules in the future. It would be relatively simple for the electricity supply companies to administer and would give a boost to the UK’s efforts to become carbon-neutral by 2050.
So how much would that cost? The Resolution Foundation estimates a reduction in VAT of £1.6bn if all domestic electricity was zero-rated. To put that another way if the zero rate of VAT was only available to domestic consumers who switched to renewable suppliers, and everybody then switched, the maximum cost to the Exchequer would be £1.6bn.
So where would the money come from?
This is where fuel duty plays its part. Fuel duty receipts contributed £27.9bn to the Exchequer in 2018/19. Fuel duty, frozen since 2011, is payable on petrol and diesel at 57.95 pence per litre. VAT at 20 per cent is payable on fuel duty, bringing the total amount of fuel duty and associated VAT to 69.54 pence per litre. The fuel duty freeze has been enormously valuable to motorists as inflation since 2011 has amounted to 26 per cent. If fuel duty had increased in line with inflation, the VAT-adjusted equivalent would now be 87.62 pence per litre. That’s a massive 18 pence per litre higher than the current total.
Something much less dramatic is required.
Increasing fuel duty to 60.85 pence per litre would, with the associated VAT, raise the necessary £1.6bn to pay for the VAT cut on renewable domestic electricity. It would also encourage motorists to change their driving habits and perhaps to switch to lower-emissions vehicles. Crucially perhaps for a government with a huge legislative programme, little or no new law would be required to accomplish this.
Another win for the government in its journey to a zero-carbon country, and all without changing the overall tax yield.
If you want to know more about how climate change might impact your businesses, or what more needs to change within our tax system to reach ambitious targets, listen to the climate change episode of The Loop.