Outrage as UK Treasury rakes in £8.4 billion with energy tax

UK ministers are being urged to scrap the tax as households struggle in the big freeze, as it emerged that the estimated amounts brought in since 2019 is enough to add an extra £300 to the £400 energy bills discount offered to consumers from October.

Analysis based on official data shows that £1.7bn was brought in from VAT on domestic fuel and power in 2020/21 alone with an estimated £153m coming from Scots households.

This year, it is estimated that despite an energy price cap set by UK Government, the tax take will double to £3.5bn with £316.24m coming from Scotland.

Since 2019, the amount brought in through the heating tax is expected to reach £8.4bn by April, next year, with £755m estimated to come from Scots families.

It comes as it has further emerged that according to Scottish Government estimates in February, the numbers in extreme fuel poverty have nearly doubled in three years.

Some 593,000 Scots households, or over one in four families, were being hit by the highest rates of fuel poverty - where more than 20% of a household's net income is spent on energy costs, as energy prices started to soar.

Concerns over the extent of the heating tax take come after the UK Government stepped in with what it described as a "historic intervention" with an Energy Price Guarantee which was to mean that the typical UK household would pay an average £2,500 a year on a dual fuel energy bill for the next two years.

It stepped in after an 80% increase in domestic gas and electricity bills was earmarked for the first half of winter through energy market regulator Ofgem's price cap.

Some 1.5m Scots households saw their energy bills rise in April after Ofgem hiked the dual fuel bills price cap by the biggest increase yet. From April 1, the three in four customers on default tariffs paying by direct debit saw an increase of £693 from £1,277 to £1971.

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The figure given for the price cap is based on what an average UK household uses. Those who use more than average will have to pay more, and those with less usage will face smaller bills.

Concerns about the tax take have been raised by UK ministers by fair energy prices campaigner Kenny MacAskill, the MP the for East Lothian and Alba Party deputy leader who believes the tax should be scrapped.

He and Energy Action Scotland, the only national campaign organisation set up to end fuel poverty in the nation, believe energy should be classed as a necessary commodity such as food items, water and prescription medications which are zero-rated for VAT.

Domestic supplies of fuel and power had been zero-rated since the introduction of VAT in 1973.

But his March 1993 Budget speech the then Chancellor, Norman Lamont, proposed to introduce VAT at 8% from the following year. At the time the Conservative Government's gave the reasons for abolishing the zero rate as to raise additional revenue in the medium term, to encourage energy conservation and to contribute to the reduction of CO2 emissions.

In July, when Prime Minister Rishi Sunak was a Conservative leadership hopeful, he pledged to temporarily scrap tax on all domestic energy bills for the next year, if he won the race even after the UK Government had introduced a £400 energy bill discount.

He said: "Tackling inflation and getting people the support they need to help with the cost of living is critical.

"That’s why, with the price cap expected to rise above £3,000 in October, I will move immediately to scrap VAT on everyone’s domestic energy bills for the next year.

"This temporary and targeted tax cut will get people the support they need whilst also – critically – bearing down on price pressures.

"As chancellor I knocked £400 off everyone’s energy bill... This additional VAT cut will help deal with the current emergency."

Frazer Scott, chief executive of Energy Action Scotland questioned why Mr Sunak as Prime Minister has gone back on his pledge.

"It is like playing with people," he said.

"For me the burden of this tax falls on the lowest income household where energy is the largest proportion of their income. Those households are paying a higher amount of VAT in real cash terms than they did before.

"He is taking proportionally more money back in VAT from the lowest households who have the least amount of wiggle room here on their costs. They can't not pay VAT because it is lumped into the price of their energy. "Many many low income families have little choice on how much they use, because they live in inefficient homes in terms of energy. You can insulate yourself from the energy crisis by being rich, because you can afford renewable heating systems and the highest levels of insulation. And insulate yourself from fluctuations in energy prices. Lower income households cannot.

"We believe energy is an essential item for health and well being in the same way as essential food stuffs are zero rated for VAT, domestic energy should be zero rated for VAT certainly for people that need the most.

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"Right now we have one in four households in Scotland in extreme fuel poverty. For me extreme fuel poverty is unaffordable costs, they cannot purchase sufficient energy to meet basic requirements. So why aren't they removing the tax burden."

When asked by Mr MacAskill about VAT revenues in March, Lucy Frazer, then financial secretary to the treasury argued that high energy prices actually reduce tax revenues.

She said that if people spent more on domestic fuel where VAT is at 5%, "they spend less on good and services that on average have a much higher VAT rate, thereby reducing VAT revenue overall".

Another UK energy action campaigner described the tax as "obscene" and added: "People do not realise just how much of their bills is going to the Exchequer when it could easily be used to help the poorest in society heat their homes."

Mr MacAskill, the former justice secretary said: "Energy’s an essential item. It’s as vital as food or a roof over your head.

"You require it not just to heat your home but to allow for work, cleanliness and even maintaining life itself if you’re on dialysis.

"It should be therefore be zero rated for VAT. It’s worsened by this double whammy of a winter freeze and a cost of living crisis but the principle remains. There should be no VAT on energy bills ever and certainly not now. Sadly, the UK government have failed to act and instead the Chancellor is making money hand over fist as bills rocket and revenue even at 5% accrues to him."

According to analysts Refinitiv there was a drop in energy consumption of just 8.7% in the last full week to December 9 compared to what would normally expected.

“There is a limit to how much people can drop their consumption of energy,” said Sebastian Sund, a Refinitiv power analyst.

It was believed to be the UK’s biggest daily energy demand of 2022 on Thursday because of the big freeze.

Demand for power hit 37.5 GWh per hour – around 10% higher than normal for the time of year and a gap equivalent to around a fifth of the average national hourly energy consumption in June.

They said that demand reached levels not seen since February 2019.

It comes as the daily average temperature forecast for Thursday was at -1C, well below the usual 5.5C around this time of year.

It warned cold weather and low winds will place further pressure on UK gas capacity which is forecast to see the highest daily residential gas demand since January 8, 2021.

A Treasury spokesperson said: “We understand the impact that global price rises are having here in the UK, which is why tackling inflation is this government’s number one priority.

“We’re holding down people’s energy bills this winter, saving the typical household around £900, and over eight million vulnerable households are receiving £1,200 in support this year.

“On top this, we’re providing £26bn of additional cost of living support next year, and have increased benefits in line with inflation which is worth £11 billion to working age households and people with disabilities.”