In one of his first moves as the UK’s new Prime Minister, Andy Burnham announced on Tuesday that the new Labour government would scrap the 5% value added tax (VAT) on electricity bills to help Britons cope with rising energy costs.
The government will introduce a tax cut to remove VAT from domestic electricity bills from October 1 in time to impact the next Ofgem price cap on energy bills for households.
This action is funded for this financial year, the new government, in office since Monday, said on Tuesday.
The cost of the removal of the VAT on electricity bills is being funded from the cancellation of the $2.4 billion (£1.8 billion) Digital ID program, the government said.
“We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope,” the new PM Burnham said in a statement.
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Cutting VAT on electricity bills is expected to take around $60, or £45, off the yearly Ofgem price cap in October.
“By targeting electricity bills, more people will be supported with rising bills and the government is helping to keep inflation down,” the government said.
All suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs.
Small businesses who qualify for the domestic energy VAT relief and are not registered for VAT, as well as charities and residential care homes eligible for the reduced rate will also benefit from the move.
UK energy prices jumped by 13% from July 1 after energy regulator Ofgem raised the price cap as a result of higher wholesale gas prices amid the Middle East crisis.
The UK has a so-called Energy Price Cap in place, which protects households from excessively high bills by capping the price that energy utility providers can pass on to them. The price cap is a limit on what suppliers can charge domestic consumers per kilowatt hour of energy used.
Today’s announcement of the removal of VAT would ease the pressure on households from the higher price cap, which is being revised quarterly.
By Tsvetana Paraskova for Oilprice.com
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