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Are Emergency VAT cuts on the way? What will this mean for Energy suppliers and Energy Billing?

image credit: Dyball

The government has come under renewed pressure to implement an emergency reduction in VAT on electricity and gas to help revive the economy in the wake of the COVID-19 lockdown.

Growing signs of a VAT cut

A new report recently published by the think tank Policy Exchange has suggested that by cutting the standard VAT rate of 20% to 15% consumer spending could receive a boost and help revive the economy.

Unlike VAT on other types of products, energy is charged at the point of consumption.

For the past nine years VAT on electricity and gas bills has been charged at the 20% rate for big and energy intensive businesses and the reduced rate (also known as the de minimis threshold) available to some small businesses is 5%. This applies if they use less than 33-kilowatt hours of electricity or less than 145 kilowatt hours of gas per day.

Domestic customers already pay the reduced VAT rate of 5% on their energy bills.

With recent economic data revealing that economic activity in the UK shrank by a record 24% in April, some economists are forecasting that a recovery could take several years unless action is taken by the government to stimulate spending.

This view was provided further credence after the Office for National Statistics released data that showed the UK economy shrank more than first thought between January and March, contracting 2.2% in the joint largest fall since 1979.

A VAT cut in July?

Pressure on the Chancellor Rishi Sunak to cut VAT has been building from politicians too, with a cross-party group of MPs signing a letter asking for such a cut to be implemented.

“Right across the UK people are desperately worried about how they will make ends meet in the face of this crisis. Many already find themselves out of work, on reduced pay or having to rely on Universal Credit.

‘Ensuring people using prepaid meters are not cut off is a first step, but there are many who will need further assistance. The very least the Government can do is offer people a break from VAT on energy bills – this would be a quick and effective step which will immediately assist some of the poorest in our society.

‘It will at least partly alleviate the additional financial pressure created by the need to stay at home," said MP Jamie Stone who led the calls for a rate cut following the release of data showing that households could see their energy bills rise by £195 a year as a result of the lockdown.

‘New Deal’ Spending

Prime Minister Boris Johnson has pledged to enact a post-pandemic spending bonanza in order to help the UK economy recover and speaking earlier in the week said that the government was planning to launch a spending plan comparable to Franklin D Roosevelt’s New Deal following the Great Depression of the 1930s.

“We must work fast, because we’ve already seen the vertiginous drop in GDP, and we know that people are worried about their jobs and their businesses. We’re waiting as if between the flash of lightning and the thunderclap, with our hearts in our mouths, for the full economic reverberations to appear,” said the Prime Minister on Tuesday.

With all these factors taken into consideration, we could see the Chancellor announce new stimulus and tax cuts in his Summer Statement with VAT reduction being one of them.

Other nations have already announced VAT cuts. Germany, for example, announced at the start of June that it would be slashing VAT from 19% to 16% from the 1st of July until the end of the year.

Would VAT cuts help consumers?

A rate cut could help consumers in the short term, but some economists are concerned that a temporary VAT cut like the one implemented by the Labour government in 2009/10 provides limited economic benefits and can cause a massive headache for businesses as they struggle to implement the changes onto all of their products.  

What will this mean for Energy Suppliers?

As well as the standard VAT rate being changed, energy suppliers also need to prepare for changes to the reduced rate.

Due to the UK still in a transition period with the EU, in theory, the reduced rate cannot be eliminated altogether but it’s not an impossibility that the current government could ignore this.

If a VAT change is introduced partway through a month then thanks to way energy is calculated bills could end up with two VAT changes on them.

Another thing to be aware of is possible changes to the de minimis threshold levels. This rate is up to which any usage should be considered. 

Energy Suppliers should prepare

There are a few ways an energy supplier can prepare for VAT changes and reduce the disruption such changes could create.

Do a test run

An energy supplier should ensure that their billing system will work correctly and provide accurate bills after a VAT change is implemented. Double check the way energy bills are calculated as rate changes can create rounding errors. 

Staff training

Make sure that staff are aware of the VAT change and trained to implement such changes to the billing system. Ensure that they have the ability and confidence to spot errors created by the rate change.

Train staff to be able to handle customer complaints. Some customers will inevitably notice any changes created by the rate alteration, so staff need to be able to explain and defend the bill.  Business customers, for example, are likely to question why their bills have two rates of VAT recorded on it and will no doubt challenge the bill.

Customer services

An energy supplier should also get ahead of a spike in customers calling and questioning their energy bill. Send letters and post notices to your websites that clearly explain the situation and what it means for consumers.

Finally, make sure that everyone in the business is aware of the rate changes. Keep them informed and make sure everyone is aligned. 

Using a CRM can help

Most Customer Relationship Management (CRM) systems can handle the implementation of VAT rate changes, but some can make the process far trickier than it needs to be and some even have VAT rates hardcoded into them and aren’t configurable.

Matthew Olney's picture

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Matt Chester's picture
Matt Chester on Jul 2, 2020 4:12 pm GMT

Is the VAT administered at a national level, or is there any variance by region? 

Henry Craver's picture
Henry Craver on Jul 4, 2020 7:23 pm GMT

Seems like a decent way of putting money in citizen's hands when they desperatly need it. But wouldn't it be simpler and more effective to actually do just that—like the stimulus checks? A lot of people live in utilities included flats and won't bennefit from a VAT cut. 

Matt Chester's picture
Matt Chester on Jul 6, 2020 11:51 am GMT

That's a good point-- and while you would hope that during these peculiar times that owners of those flats would be understanding and pass such savings onto their struggling tenants, no doubt that would be too optimistic a view for the whole of the system. And it would probably just add complication and political issues to add in some sort of provision to the measure that required that to be done

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