VAT on Fuel

During the election campaign, EU officials challenged Labour's proposal to reduce VAT on fuel, claiming it ran contrary to the spirit of European legislation aiming to harmonise VAT rates. In mid- May, however, Mario Monti, the internal market commissioner said he did "not see any particular legal obstacle at this stage" to the VAT cut - thereby dropping the Commission's threat to take the Government to the European Court.

The tax reduction is estimated by the Institute for Fiscal Studies (IFS) to cost around £400 million. They have calculated that the change will boost household incomes by 40p a week on average, as detailed below:

VAT on fuel was initially announced in Norman Lamont's March 1993 budget. He introduced the tax at a starting rate of 8% rate in April 1994, and planned to increase it to 17.5% in April 1995. On 6 December 1994, Labour successfully tabled a motion in the Finance Bill debate to prevent the second stage of the increase, aided by a smaller government majority and a rebellion by seven Conservative MPs.

The proposed cut in VAT on fuel has been criticised by the Liberal Democrats who have recommended that the government should instead reduce VAT on energy saving materials to 8% - a policy Labour supported in a 1996 Commons vote.

Labour has made no commitment not to extend VAT to other zero-rated goods such as new housing (the zero-rating of which is estimated by the IFS to cost around £2.15bn a year), drugs and prescription charges (costing £700m per year) and international passenger transport (costing £1,150m per year but already subject to Airport Passenger Duty).

The Government could also introduce VAT on a number of goods and services currently exempt from the tax, such as rent on domestic dwellings (estimated cost of exemption: £3bn), rent on commercial properties (£1.3bn), private education (£1.05bn), health services (£450m), postal services (£450m), burial and cremation (£100m), finance and insurance (£50m), betting and gaming (£700m) and small traders (£100m).