Treasury makes almost £1 billion from energy hikes

British Gas yesterday announced that it is raising prices for 8 million customers by 9 per cent, a week after its rival SSE announced similar hikes. Other major energy companies are expected to follow suit.

However, the Treasury is also making hundreds of millions of pounds from the price rises because of the 5 per cent VAT it imposes on energy bills.

Figures published by HMRC indicate that the amount raised by the taxman from energy bills has risen from £933 million in 2006 to £1.7 billion last year., the price comparison website, has estimated that the government will make £158 million in VAT from the latest round of price rises.

The Treasury said that under EU laws, VAT on energy bills cannot be set at a lower rate than 5 per cent, reports The Telegraph.

Robert Halfon, the Conservative MP who successfully campaigned to freeze fuel duty, called on the Prime Minister to repatriate the power to set VAT levels ahead of the referendum on Europe next year.

He said: “It [the 5 per cent rate] should be scrapped or reduced, it is a realistic way of cutting energy bills and a Conservative way as well. That is why a fundamental part of our renegotiation with Europe must be about VAT. As a country, we must regain sovereignty over our VAT rates.”

He said that Ed Miliband, the Labour leader, had identified a “major problem” when he pledged to freeze energy prices at the Labour party conference last month.

Mr Halfon said: “We have got to deal with it properly. It is a quack solution but he has identified an important issue. Cutting VAT would on energy bills would be the moral choice.”

Mr Halfon will this week write to George Osborne, the Chancellor, to raise his concerns. His proposals are supported by a number of other Tory back-bench MPs.

Mark Todd, a spokesman for, said: “People will find it totally galling to see the Treasury making all this money while their bills are going up. The government’s take keeps rising with the bills, we are very concerned by it.”

A government spokesman said: “A reduced rate of VAT of five per cent currently applies to domestic heating and power. This has been in place since 1997 and is the lowest rate possible under EU law.

“The existing law means that Government cannot introduce a new zero rate, nor can we unilaterally extend the scope of our existing zero rates as this would require a change to EU VAT legislation.

“Any change to legislation would require a proposal from the European Commission and the unanimous agreement of all 28 Member States.”

Soaring energy bills are one of the main contributors to the UK’s high inflation. A report by the OECD published earlier this year found that energy inflation in the UK was 2.2 per cent – more than four times the rate of increase in Germany.