VAT cut 2022: How Labour’s tax proposal could have affected your energy bills

Martin Lewis discusses the April increase in energy bills

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The Government voted down a motion put forward by the Labour Party to scrap VAT on household bills, despite both the Prime Minister and Michael Gove endorsing the cut during the Vote Leave campaign in 2016. As British households brace themselves for rising energy bills when the current cap is lifted in April, here’s what a VAT cut on energy bills could mean – and why the Government voted against the measure.

On Opposition Day in the House of Commons, Labour were able to lead the discussions and chose to put forward a binding motion to cut VAT on energy bills from it’s current level at five percent down to zero percent for one year.

The opposition party, led by Sir Keir Starmer, proposed a windfall tax on the North Sea oil and gas industry.

However, the proposals were voted down by 321 noes to 229 ayes – 320 of the noes coming from Conservative MPs.

Many energy customers are already feeling the squeeze of the energy crisis, causing their bills to rise. But in February, Ofgem will review the current cap for what energy firms can charge customers.

If Ofgem raises the cap, in April 2022 energy bills could continue to rise even higher.

Currently, Ofgem states the cost of VAT on an average household energy bill as £61, whereas the average household energy bill is £1,277.

Analysis by the Labour Party said its package to help households could save “most households around £200 or more”.

The Labour Party’s analysis was based on an estimate that the average household bill will rise to £1,865, according to the BBC.

Labour’s statement said: “Crucially, the Party said it would also target extra support to squeezed middle, pensioners and the lowest earners, receiving up to £600 off bills and preventing all of the increase in energy bills currently expected.”

During the campaign to leave the European Union, prominent members of Vote Leave Boris Johnson and Michael Gove said once Britain left the EU, the five percent VAT on energy bills could be scrapped.

Writing in The Sun in 2016, the pair said the tax was “unfair and damaging”.

The then-Justice Secretary Michael Gove also said to Sky News: “If we leave the EU and we can use the millions of pounds that we would save from being outside the EU to cut VAT on fuel and that would help the poorest families most of all.”

However, in the House of Commons on Tuesday January 11, it was the Labour Party pushing to scrap the five percent VAT for one year, making households pay zero percent VAT on their energy bills, while the Government rebutted.

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Shadow Chancellor Rachel Reeves introduced the motion, saying: “Prices are rising, bills are soaring, inflation is at its highest level for three decades, the growing cost of living crisis is leaving families across our country worse off.”

Ms Reeves said the Chancellor had taken “no action on rising costs”, while the rise in national insurance represented a “tax on jobs”.

Ms Reeves went on to accuse the Conservatives of having become a “high-tax, high-inflation party, because they have become a low-growth party”.

She urged the Government to vote for Labour’s motion as a “straightforward step” to help UK households.

Ms Reeves went on to argue pensioners and low-income households are those who are paying the highest proportion of their income on energy bills.

Chancellor Rishi Sunak didn’t appear in the chamber today to refute Ms Reeves’ attack on his record as Chancellor, but Simon Clarke, the Exchequer Secretary, filled in.

Mr Clarke, responding on behalf of the Government, said: “The government recognises the pressure that people are facing on their household finances including on their energy bills.

“The reality is that the higher inflation we’ve seen is primarily due to global factors and related to a large degree the fall out from the pandemic and to a global spike in energy costs.”

Mr Clarke pointed to other sources of support the Government has offered, such as the £500 million Household Support Fund, designed to support vulnerable families with paying their bills over the winter.

Mr Clarke also argued the Government’s investment in renewable energy helped to reduce the UK’s exposure to the energy crisis, as demand for natural gas has fallen by 26 percent since 2010.

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