Economist David Osmon, writing in a personal rather than official capacity, said the “progressive” system of tax “would yield spectacular benefits” by reducing energy consumption and raising more tax.
Proposed Progressive VAT System
In a paper for the Economics Lab think tank, Osmon proposed a new VAT structure for energy:
- 0% VAT on standing charges
- 5% VAT on energy use up to “average” levels
- 20% VAT on energy consumption above average usage
He calculated that this system could reduce overall energy demand by around 2%, cut energy bills for most households by an average of £7, and increase Treasury revenues by approximately £1.1 billion annually.
“The beauty of progressive VAT lies in its simplicity,” Osmon said. “You gain all these benefits by just altering slightly the prices that consumers face. It’s also likely to be more widely accepted than most taxes because it enables people to choose how much tax to pay.”
Energy Companies Under Scrutiny
The proposal comes shortly after Britain’s “Big Six” energy companies — Centrica (British Gas), EDF, E.ON, Scottish Power, SSE and nPower — were accused of taking their customers “for granted” in an investigation by the Competition and Markets Authority (CMA).
The CMA found that customers were paying £1.7 billion more than they should have in a fully competitive market, highlighting persistent issues around transparency and consumer understanding in the UK’s energy sector.
Consumers Still Confused About Energy Bills
According to a uSwitch.com survey, six out of ten consumers still do not understand their energy bills — despite reforms introduced two years earlier to make the information clearer.
This lack of understanding means that millions of households may not be aware of how much they’re actually paying or how VAT affects their energy costs.
What About VAT Heating Oil?
While this discussion focuses primarily on electricity and gas, it’s worth clarifying how VAT applies to heating oil. Many rural homes rely on heating oil or kerosene instead of mains gas. The VAT you pay depends on whether your usage is domestic or commercial.
- Domestic use: 5% VAT rate — this applies to households using heating oil for home heating.
- Business or commercial use: 20% VAT rate — standard VAT applies to non-domestic properties.
Some customers are confused by the term “a heating oil vat” — which typically refers to the storage tank or container that holds your fuel. However, owning a heating oil vat (tank) does not affect the VAT rate. The applicable VAT depends entirely on how the fuel is used, not how it’s stored.
For more detailed guidance, you can check HMRC VAT Notice 701/19 or visit our resource page on Heating Oil VAT rules.
Implications for Households and Businesses
Should the government ever adopt a progressive VAT model, the impact could be significant:
- High-consumption households would pay more VAT on energy.
- Energy-efficient homes would benefit from lower tax exposure.
- Businesses with high power demands might face additional costs.
- Suppliers of heating oil and fuel may need to reassess billing and reporting structures to ensure compliance.
It remains to be seen whether such a model would be politically feasible or administratively practical. Still, the debate underscores the growing focus on how tax policy can drive both conservation and fairness.
Expert Commentary
Energy analysts have pointed out that while a progressive VAT might encourage efficiency, it could also add complexity to billing systems and create disparities between different types of energy consumers. Critics argue that such a system could penalise larger households or those in colder regions with naturally higher heating demands.
On the other hand, supporters say that linking tax rates to energy consumption provides a transparent, market-based incentive to use less — aligning environmental and fiscal goals.
Summary
Economist David Osmon’s proposal for a progressive VAT structure highlights the ongoing debate about fairness and sustainability in the UK energy market. Whether it’s mains electricity or heating oil stored in a heating oil vat, understanding VAT rules remains crucial for every consumer.
For the latest updates and advice on VAT rates for domestic and commercial fuels, visit Barton Petroleum or consult HMRC’s official VAT on Fuel and Power guidance.
Source: Ofgem / Economics Lab
