Andy Burnham has scrapped VAT on household electricity bills in the first economic step of his premiership, which amounts to £45 a year in the average bill and is paid for by pulling the plug on Sir Keir Starmer’s digital identity scheme. However, for many business owners, help stops at the home meter.
The 5% tax comes from debts on 1 October, which is set to hit Ofgem’s next price target, and is expected to cost the Treasury £850 million this year. According to Downing Street’s announcement, the savings come on top of the £150 taken out of debt in the last Budget, and all suppliers are expected to take the cut, including customers on fixed incomes.
The prime minister, who entered Downing Street on Monday with eight out of 10 SME owners looking to make an impact, said he wanted to “restore hope” by reducing the cost of living stress.
“Westminster is no longer working for people, and families are struggling with the cost of living,” he said. “That must change, I was saying that I want to give people a breathing space, I am announcing that on the second day as prime minister.
“We are taking immediate steps to reduce the tax on electricity bills, put more money in people’s pockets and restore hope.”
John Healey, who gave the Treasury in the surprise first appointment of the new administration, said that the cuts will be funded by canceling the digital ID scheme, which was supposed to cost £1.8 billion over the next three years.
“Many people have been struggling with the cost of living for a long time,” said the chancellor. “Today’s reduction in electricity tax will give families some breathing space on their debts, and provide some certainty this winter.
“This initiative is supported this year by the cancellation of the digital ID scheme, and will help reduce inflation while feeding households in all postcodes.”
Who really benefits
The limitation applies to household appliances only. Small businesses that qualify for home energy VAT relief and are not VAT registered will benefit, the Treasury has confirmed, as well as charities and care homes that qualify for a reduced rate. Sole traders and a host of home businesses will at least see savings on their household bills.
For everyone, small changes. Firms registered for VAT also claim tax on their energy in any case, while commercial goods remain completely unannounced, and without any price. Almost four in five businesses have reported a significant increase in their energy bills in the past year, and campaigners continue to insist that home-style protection is extended to commercial users.
A clear award for employers is not straightforward. The Treasury estimates that this factor will shave about 0.10 percent off CPI income, a modest but useful indicator for firms struggling with wage demands and waiting to borrow cheap money.
One wrinkle for Northern Ireland: EU VAT rules still apply there, so the Executive will get the same funding to support families directly.
‘It doesn’t go far enough’
The Liberal Democrats were not happy. “I don’t think it’s the best way to help people with energy bills and it doesn’t go that far, but at least it’s something, right?” Sir Ed Davey told BBC Breakfast, saying his group’s alternative plan would double the household’s savings.
Davey called for a Budget “as soon as possible” so people can see “the real Mr Burnham”, adding: “Let’s go around the table and get these things right for our country.”
That Budget is where the real answers lie. Any further action, including funding beyond this financial year, will be subject to the OBR’s full forecast. Business owners will soon find that the new prime minister’s breathing space extends beyond the front door.
