Ability to reduce Northern Ireland energy bills could be impacted by EU VAT changes, say MPs

EU proposals to reform the block’s VAT regime could complicate any future government efforts to ditch VAT on energy in Northern Ireland, according to a new analysis from the European Scrutiny Committee, affecting a potentially useful lever in combatting the cost-of-living crisis in the region if passed.

The planned new Tax Directive, expected to be adopted in spring this year and enforced from 2025, would give EU member states more flexibility to apply zero-rating. But it will restrict the number of categories of goods and services on which they can apply it at any one time. It would also set a VAT floor for fossil fuels of 15%, the current general minimum VAT rate across the block, to incentivise member states to meet the EU’s net-zero ambitions.

Under the Northern Ireland Protocol, all goods in Northern Ireland must follow EU VAT rules, and for tax purposes electricity and gas are treated as goods. EU law already bans VAT rates below 5% on energy bills, but this new Directive would change how countries can decide the rates applicable when goods and services are sold.

If EU VAT rules still apply in Northern Ireland after the government finishes its negotiations with the EU on the Protocol, it would be up for the UK government to decide which seven categories would apply to Northern Ireland. However, should the government decide in the future that it wishes to drop VAT on gas and fuel it could end up needing to make a choice between leaving Northern Ireland out of the policy or having to be selective over what categories of other goods will have a zero-rate in NI to accommodate it.