Zero-rate household energy VAT: calculation note

Central fiscal result

+£2.4bn - Net fiscal impact in 2028-29

Low case: +£1.5bn. High case: +£3.5bn. Positive numbers are fiscal costs or borrowing pressure. Negative numbers are Exchequer savings or receipts.

Scenario and baseline

• Model household energy VAT reduced to zero for 2028-29.
• Central cost is £2.4bn annual VAT loss.
• Baseline is reduced-rate VAT on domestic energy.
• Three-year duration is included in phasing only.

Affected population

• Affected population is households paying domestic energy bills.
• Direct gains rise with energy consumption.
• Indirect exposure includes suppliers and inflation indices.
• Business energy VAT is excluded centrally.

Gross impact

• Central gross VAT loss: £2.5bn.
• Behaviour and other receipts offset about £0.1bn.
• High case assumes high prices and high consumption.
• No carbon-cost increase is fiscal-scored.

Fiscal build-up, central case

• Lost household energy VAT: +£2.5bn
• Higher indirect receipts: -£0.1bn
• Administration savings: £0.0bn
• Energy-demand effects: £0.0bn

Central net impact: +£2.4bn in 2028-29.

Behaviour and pass-through

• Low case assumes lower wholesale prices and consumption.
• Central case assumes most VAT cut passes through to bills.
• High case assumes higher prices and larger taxable base.
• Demand rises slightly when prices fall.
• Distributional gains are broad, not targeted.

Phasing

• 2026-27: +£1.0bn. Preparation or partial implementation.
• 2027-28: +£2.2bn. Main ramp-up year.
• 2028-29: +£2.4bn. Target-year central estimate.
• 2029-30: +£2.4bn. Continuation at steady-state assumptions.

Main source groups

• HM Revenue and Customs, "Direct effects of illustrative tax changes bulletin" (2025): HMRC provides direct-effect estimates for illustrative changes to SDLT, VAT, fuel duties and other taxes; anchors tax costs before behavioural and macro adjustments.
• Office for Budget Responsibility, "Economic and fiscal outlook: March 2026" (2026): The OBR forecast sets the macro, borrowing and receipts baseline used for broad fiscal context; prevents treating tax cuts or spending changes as self-financing.
• Benzarti, Carloni, Harju and Kosonen, "What Goes Up May Not Come Down" (Quarterly Journal of Economics, 2020): VAT rises and cuts need not pass through symmetrically to consumer prices; relevant to household energy VAT and private-school-fee VAT reversals.
• Mirrlees and review team, "Tax by Design: The Mirrlees Review" (Institute for Fiscal Studies and Oxford University Press, 2011): Efficient tax systems use broad bases, coherent rates and few arbitrary reliefs; frames the efficiency trade-off when tax cuts are not matched by credible funding.
• Conservative Party, "Our Plan for Britain" (2026): Used to define the pledge wording, policy scope and implementation scenario being modelled.