PolicyLens

Methodology note

Zero-rate household energy VAT: calculation note

Scenario assumptions behind the Zero-rate household energy VAT estimate. The figures are illustrative and exclude unrelated Conservative pledges.

View main policy page: Zero-rate household energy VAT

Central fiscal result

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

Low case: +GBP 1.5bn. High case: +GBP 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 GBP 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: GBP 2.5bn.
  • Behaviour and other receipts offset about GBP 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: +GBP 2.5bn
  • Higher indirect receipts: -GBP 0.1bn
  • Administration savings: GBP 0.0bn
  • Energy-demand effects: GBP 0.0bn

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

Main source groups

  • con-plan-2026: Conservative live policy page; used to identify current pledge wording.
  • hmrc-ready-2025: HMRC tax ready reckoners; main tax-cost anchor.
  • obr-efo-mar-2026: OBR March 2026 forecast; fiscal and macro baseline.
  • benzarti-et-al-2020: VAT incidence asymmetry; informs behavioural and incidence assumptions.
  • mirrlees-2011: Tax design principles; informs behavioural and incidence assumptions.