What could happen to VAT and energy prices if we leave the EU?

31 May 2016
What was claimed

EU rules mean we cannot take VAT off energy bills.

Our verdict

That’s right. EU rules mean we cannot reduce VAT on household energy any lower than the 5% that’s currently charged. All EU member countries would have to agree any changes to these rules.

What was claimed

If we leave the EU, fuel bills will be lower.

Our verdict

Leaving aside the wider economic impacts of leaving the EU, if we vote to leave the government could choose to remove the 5% VAT rate on fuel as Vote Leave has suggested. Having the power to do this doesn’t necessarily mean energy bills will be lower if we leave.

“…if we leave the EU…fuel bills will be lower.”

“In 1993, VAT on household energy bills was imposed. This makes gas and electricity much more expensive. EU rules mean we cannot take VAT off those bills.”

Michael Gove, Boris Johnson and Gisela Stuart, 30 May 2016

EU rules mean that VAT rates can't be lowered below 5%.

Household gas and electricity is currently charged at 5% in the UK, so it’s not currently possible to reduce it any lower than this under current EU rules.

Any changes to the EU rules would have to be passed unanimously by member countries.

If we voted to leave the EU, we could remove VAT from household fuel.

That wouldn’t automatically lead to lower prices. First, the government would have to choose to cut VAT on fuel. That would mean it either ends up with less money, or has to raise more money from elsewhere, at a time when pressure on public finances is predicted anyway.

Secondly, prices might be pushed up anyway in the short term due to the expected drop in the value of the pound.

EU rules on VAT

EU rules set a standardised system for VAT across EU member countries, including a standard VAT rate of no less than 15% and a reduced rate for certain goods or services of no less than 5%.

Categories of products that were already taxed below the minimum 5% VAT rate before 1991—like cakes and bread—can continue to be taxed at that lower rate (0%, in practice).

In the UK, household energy was charged at the 0% rate up until 1993, when a rate of 8% was introduced, before falling to 5% in 1997.  

What would happen if we vote to leave the EU

Vote Leave says that if we vote to leave we can scrap VAT on household fuel. That’s right.

But it’s not as easy to say that energy bills would fall if we leave the EU, as Vote Leave has said.

Whether we removed the tax on fuel would depend on whoever is in power and how they consider the measure in the context of the wider economic impacts of leaving.

Most economists think that leaving the EU would come at some economic cost, so whoever was in power might have to consider this policy in the context of tax receipts growing less quickly than they would have done and making up a smaller share of national income.  

Other factors will also influence bills if we vote to leave.

For example, it’s widely expected, including by the Governor of the Bank of England, that if we leave the EU the short term impact would include a fall in the value of the pound. A weaker pound will affect the price of energy imported from abroad, which could then push overall energy bills up.

The longer term is of course more uncertain.

Another factor that might influence prices is whether or not we would stay in the EU’s single energy market if we left the EU.

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