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Ofgem Adviser: big energy users should be paying VAT at 20%

Families who use large amounts of gas and electricity should be hit with a higher level of VAT on their energy bills, according to a senior adviser at industry regulator Ofgem.

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.

In a paper for the Economics Lab think-tank, Osmon proposed dropping VAT altogether for standing charges, keeping the current 5% rate for consumption up to “average” levels but raising it to 20% for above average usage.

He has calculated that the system would reduce overall energy demand by 2%, cut energy bills on all but the biggest users of by an average of  £7 and increase Treasury revenues by around £1.1 billion.

He said: “The beauty of progressive VAT lies in its simplicity. 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.

“It progressively taxes what they decide is their disposable income and those who aren’t price sensitive pay more.” The proposal comes after Britain’s “big six” energy companies — British Gas owner Centrica, EDF, nPower, Eon, Scottish Power and SSE— were last month accused of taking their customers “for granted” in an investigation by the Competition and Markets Authority.

It calculated that customers were paying £1.7 billion more than they should have done in a fully competitive market.

A uSwitch.com survey this week found six out of 10 consumers still do not understand their energy bill. This is two years after the introduction of reforms designed to make the information simpler and clearer.

Source: Ofgem