Would leaving EU save British households £1.7bn a year on energy bills?

The leave campaign has claimed that quitting the EU would save British households £1.7bn a year on heating and lighting, or £64 a year per household, because the government would be free to scrap VAT on domestic fuel.

Writing in the Sun, Boris Johnson, Michael Gove and the Labour MP Gisela Stuart argue that “fuel bills will be lower for everyone” if Britain votes to leave the EU on 23 June.

VAT on domestic fuel, introduced in 1993, is set at 5% and cannot be reduced under EU rules, they argue. The tax hits the poorest hardest because they spend three times more of their income on household energy than rich households.

“When we vote leave, we will be able to scrap this unfair and damaging tax,” the MPs wrote.

The Sun’s news story puts the total saving at £2bn, though the leave campaign’s supporting material claims the lower number of £1.7bn.

What is the evidence?

The Sun’s news story refers to “the hated 5% levy ordered by Brussels” but VAT on household fuel was introduced by the Tory chancellor Norman Lamont as a revenue raising measure with no EU involvement – though he said Britain’s zero rate stood out in the EU.

Lamont set the rate at 8% from 1 April 1994 and planned to increase it to the standard rate, then 17.5%, a year later. After a defeat on a budget resolution in December 1993, the government backtracked and left the rate at 8%. Labour cut it to 5% after it was elected in 1997, fulfilling a promise in its manifesto.

The leave campaign is correct in saying VAT on fuel cannot be cut while the UK is in the EU. A member state’s standard rate of VAT must be no lower than 15% but a rate of no less than 5% can be charged on particular goods and services, including supplies of natural gas and electricity.

Once Lamont imposed VAT on household fuel, under EU rules no British government was able to cut it. Some zero rates still apply in Britain and elsewhere in the EU but only on goods that incurred no VAT on 1 January 1999. A zero rate cannot be reintroduced once it has been abolished.

As far as the leave campaign’s figures go, it has helpfully supplied links to government statistics. Office for National Statistics figures from December 2015 show the average household spends £25.80 a week on gas, electricity and other fuels. That adds up to £687m a week across the UK. Multiply that number by 52 and you get £35.7bn a year of which 5% is £1.78bn.

Another way of calculating it is to take the Treasury’s estimate of tax forgone by charging the reduced rate compared with the standard rate of 20%. That figure is £4.8bn for this year, implying 5% equals £1.6bn. Split the difference between the two calculations and you have £1.7bn, so the leave campaign’s figure seems fair enough. For the potential annual saving per household £25.80 multiplied by 52 is £1,342. And 5% of that is £67, so that figure looks about right too.

The remain campaign doesn’t take issue with the opposing side’s figures but it is scornful about the assertion that “the cost of this tax cut can easily be paid for by using savings from our contribution to the EU budget” of £10.7bn.

The remain campaign has instead attacked leave campaigners’ “fantasy economics”, arguing there would be no scope for tax cuts because the economy would be damaged by a vote to leave. It cites George Osborne’s warning of a DIY recession and the Bank of England, though the Bank only said a recession could result from leaving.

Osborne weighed in on social media to hammer home the point.

Remain also cited the Institute for Fiscal Studies’ prediction that a vote to leave would knock a £20bn to £40bn hole in the government’s finances by 2020 and delay a budget surplus by two years. According to remain campaigners, the leave campaign has made £111bn of unfunded spending promises based on leaving the EU.