There are two Opposition day debates scheduled for Tuesday 11 January. The first debate is on VAT on household energy bills, and the Opposition's motion calls for the Government to 'cut the rate of VAT for household energy bills as soon as possible'. The second debate is on reducing costs for business, and the Opposition's motion calls for the Government 'to reform business rates, to alleviate the debt burden by allowing businesses flexibility on Government loans and to implement a contingency fund to support businesses with high energy costs.'
This landing page collates Commons Library briefing material, and other material relevant to each debate.
VAT on household energy bills
Domestic supplies of fuel and power are liable to VAT at 5%, under group 1, schedule 7A to the Value Added Tax Act (VATA) 1994. Further details on the scope of the 5% rate is provided in HMRC’s guidance: VAT Notice 701/19, April 2016.
When VAT was introduced in the UK in 1973 domestic supplies of fuel and power were charged VAT at the zero rate. In the March 1993 Budget the then Conservative Government proposed replacing the zero rate in two stages – first raising it to 8% in April 1994, then to the standard rate of VAT (then 17.5%) from 1 April 1995. Cross-party opposition to the second of these changes saw the rate frozen at 8%.
Subsequently, in its manifesto for the 1997 General Election, the Labour Party proposed cutting the rate to 5%. Following its election victory that year, the new Labour Government introduced the 5% rate from 1 September 1997. This 5% rate was as low as the Government of the day could go. This was because, prior to Brexit, the UK was constrained by EU-wide rules on VAT, which set limits to all Member States' in setting VAT rates.
HM Revenue & Customs publish estimates of the costs of various tax expenditures and reliefs. HMRC’s last annual survey - published in December 2021 - estimates that this 5% reduced VAT rate on domestic supplies of fuel and power was worth about £5.2 billion a year (estimate for 2021/22; see Table 1: Estimated cost of non-structural tax reliefs). In answer to a parliamentary question about VAT on energy bills the then Financial Secretary Jesse Norman said on 2 February 2021, “In recognition of the fact that families should not have to bear all of the VAT costs they incur to meet their needs, households already benefit from a reduced VAT rate of 5 per cent on domestic supplies of gas and electricity.”
The Resolution Foundation estimate that cutting VAT on energy bills would cost around £2 billion.
Although the UK is not constrained by EU VAT law in crafting new VAT reliefs, in the past ministers have been reluctant to introduce new VAT reliefs for a number of reasons.
Setting VAT reliefs
VAT reliefs are not means-tested at all, so there is an argument for targeting them quite narrowly. Second, extending the scope of relief carries with it the risk that individuals might seek to exploit it, or that the boundary between what is eligible for relief and what is not becomes legally contentious. Third, there may be many candidates for VAT relief, and a risk to undermining the tax base if Ministers find that agreeing to one relief makes it hard not to agree to others. Clearly any extension in VAT reliefs would mean that the rate of VAT on everything else would have to rise, to ensure the tax still raised as much money as it does.
Commons Library briefings
VAT on fuel and power, Commons Library briefing, 9 July 1997 (this archive paper discusses the history to the introduction of the current 5% VAT rate on this supply).
VAT: the new 20% standard rate, Commons Library briefing, 3 September 2013 (this archive paper explains how VAT works, and how the burden of this tax has been measured, as well as the history to the introduction of the current 20% standard rate in 2011).
Energy bills and tariff caps, Commons Library briefing, 6 August 2021.
The energy price crunch, Commons Library briefing, 5 January 2022.
Background to the Autumn Budget and Spending Review 2021, Commons Briefing paper, 21 October 2021 (see Section 5: Cost of living pressures and who is affected).
Help with energy bills, Commons Library briefing, 27 March 2019
Other material
Peter Levell and Heidi Karjalainen, The cost of living crisis – who is hit by recent price increases?, Institute for Fiscal Studies, November 2021.
Resolution Foundation, Labour Market Outlook Q4 2021, 29 December 2021 (the paper discusses rising energy bills and taxes).
Jonathan Marshall, Working from home means bigger bills and highlights the need for better insulation, Resolution Foundation, 10 January 2022
Torsten Bell, Spiralling energy prices will turn the UK’s cost-of-living crisis into a catastrophe, Resolution Foundation, 10 January 2022.
Reducing costs for business
Commons Library briefings
Reviewing and reforming local government finance, Commons Library briefing, 4 August 2020 (this paper includes a discussion of the options for reforming business rates)
Town centre regeneration, Commons Library briefing, 14 December 2021 (see Section 4: High streets and business rates)
Coronavirus: Support for businesses, Commons Library briefing, 22 November 2021
Coronavirus business support schemes: Statistics, Commons Library briefing, 16 December 2021
Other material
HM Treasury, Fundamental review of business rates: final report, October 2021
HM Treasury, Business Rates Review: technical consultation, November 2021
Treasury Select Committee, Impact of business rates on business, HC 222, 31 October 2019 (written and oral evidence for the inquiry is collated on the Committee's page).
Neil Amin Smith, Tom Harris and David Phillips, Taking control: which taxes could be devolved to local government?, Institute for Fiscal Studies, March 2019
Adam Corlett, Andrew Dixon, Dominic Humphrey & Max von Thun, Replacing business rates: taxing land, not investment, Introducing the Commercial Landowner Levy, September 2018