Green Alliance calls on government to end £2bn VAT subsidy on gas, which benefits well off, to help fund warm homes for poorer households
Campaigners are calling for VAT to be reformed to help both accelerate the roll out of green home upgrades and reward positive consumer action to reduce waste.
In a new report titled Added Value: Improving the Environmental and Social Impact of UK VAT, think tank Green Alliance today argues that the current five per cent rate of VAT on heating gas disproportionately benefits richer households, which typically use more fuel to heat larger homes.
According to the research the richest 10 per cent of UK households use twice as much heating fuel as the poorest 10 per cent.
As such the campaign group is calling on the government to raise VAT on heating gas to 20 per cent, using the extra £2.2bn raised to fund the insulation of homes for poorer households.
Libby Peake, head of resource policy at Green Alliance, said now was the right time to reconsider "what taxes are for, including what is taxed and why".
"For the government to show it is serious about its promises to both green the economy and level up the country, it must end this massive subsidy to the fossil fuel industry and use the funds to ensure those who are less well-off have warm homes that are inexpensive to heat," she added.
Writing in support of the proposals, Professor Paul Ekins, director and professor of resources and environmental policy at the UCL Institute for Sustainable Resources, said: "Like most fossil fuel subsidies, reduced VAT on household energy disproportionately benefits the wealthy because they use more energy than less well-off households. This not only makes no sense in itself, it also disincentivises richer households from making their own investments in energy efficiency, at a time when the government is making subsidies available for this too."
Campaigners have long argued that there is a inconsistency whereby energy is taxed at the five per cent rate, but many energy-saving and clean energy-generating technologies continue to be taxed at the standard 20 per cent rate.
Moreover, green groups and businesses have warned that without a long term funding settlement for the government's domestic energy efficiency programme the soon to be launched £3bn Green Homes Grant scheme will simply result in a boom and bust cycle whereby a wave of government-funded upgrades are followed by a sharp slowdown in the green retrofit market.
However, previous attempts to convince the government to effectively increase VAT on energy have faltered amidst concerns it would lead to a higher cost of living and would exacerbate fuel poverty.
A Treasury spokesman said there were currently no plans to change the level of VAT levied on energy. "The UK offers a reduced rate of five per cent VAT on domestic fuel and power, which applies regardless of whether energy derives from a renewable source or not," they said. "The reduced rate is important in keeping bills down for families and, while all taxes are kept under review, there are currently no plans to change it. We're committed to meeting our climate change and wider environmental targets, including our commitment to net zero by 2050."
The Green Alliance report was released after home cleaning products Splosh called on the UK government to "show leadership" and cut VAT for products that help to reduce plastic waste and encourage circular economy business models.
The company, which provides refillable plastic bottles and condensed cleaning products that serve to slash plastic waste levels, saw an 80 per cent increase in sales during lockdown.
Now the company's founder, Angus Grahame, is urging the government to tweak VAT rates to help incentivise consumers to reduce plastic waste levels.
"The lockdown has caused a step change in behaviour - everyone is much more used to shopping online for their home essentials, like laundry detergent and hand wash," he said. "This will take refilling into the mainstream as it's both perfectly suited to selling home essentials online and the best way of effectively tackling plastic waste. The Government should take the lead and support refilling with a VAT holiday on zero plastic waste businesses."
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