10 Feb, 2021 @ 12:45
3 mins read

Why did the Minister of Finance refuse to lower the VAT on electricity in January after prices reached an all-time high? An EXPLAINER on VAT electricity and gas rates in Spain, the UK and the EU

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TAXES: Less money to be spent on improvements

IT has been an expensive start to the year for taxpayers in Spain. The combination of the coronavirus pandemic and storm Filomela, which blanketed parts of the country in snow, led to electricity prices rising by a whopping 27%. On January 25, the wholesale price of electricity even exceeded €100 megawatts per hour, a record level, forcing the taxpayer to dig deep in a time of profound economic downturn.

All things considered, it is no surprise that there was outrage at the recent decision of Maria Jesus Montero, the Spanish Minister of Finance, not to lower the value-added tax (VAT) on electricity from 21% to 10%, as requested by Jose Miguel Fernandez Viadero, a senator of the Regionalist Party of Cantabria, and other politicians. Montero said this ‘would not be in line with what is marked by Europe’, which warns against ‘excessive’ VAT reductions. 

But what exactly constitutes an ‘excessive’ VAT reduction, and why is the VAT on electricity in Spain 21% while it is 5% in the UK? Is 21% even high for the EU?

Here are the answers to all these questions and more.

The standard minimum VAT rate in the EU is 15%, but there are exceptions…

Within the EU, the minimum standard VAT rate is set at 15%. However, the EU also permits two lower rates – ‘reduced’ and ‘super-reduced’, of which the lowest must be 5% or above – as well as a zero rate. 

Some countries also have a so-called ‘parking rate’ – another, reduced VAT rate that is only permitted if it was already in place as of January 1, 1991, and which is set at a minimum of 12%. Neither Spain nor the UK has a parking rate.

Currently, Member States can only apply reduced VAT rates to the goods and services specified in Annex III of the EU VAT directive. However, a proposal to abolish this annex is under discussion, which would mean total freedom for Member States to define the scope of reduced rates. This would apply as of 2022.

So what are the VAT rates (on electricity and gas) across EU countries and in the UK? 

The average standard VAT rate in the EU is 21.30%, whereas the standard rate in Spain is 21% and in the UK it is 20%. In Hungary it is as high as 27%.

The standard rate, however, is only half the story, as much depends on the goods and services to which countries apply their reductions or zero rates. 

For example, the UK applies (and applied, when it was part of the EU) far more VAT reductions than many other European countries, including zero rates on supplies of animals for human consumption and household water supplies, among other things. 

Denmark, on the other hand, charges 25% VAT on a wider range of goods and services, with only newspapers and journals (that publish more than once a month) and intra-community and international transport taxed at 0%.

When it comes to electricity and natural gas, most EU countries do not apply a VAT reduction, and the current lowest VAT rate on these goods in the EU is 5.5% (France, only for the elderly; otherwise 20%), though it used to be 5% (UK, only for domestic use; otherwise 20%). 

In this regard, the 21% applicable in Spain is moderately high, but far from the highest.

Could Spain reduce the VAT on electricity and gas? And what are ‘excessive’ VAT reductions anyway?

Electricity and gas are not mentioned in Annex III of the EU VAT Directive, meaning the simple application of a reduced rate is not possible. However, Francesca Cerqua, Knowledge Manager at Marosa VAT in Spain, told The Olive Press that countries can lower the VAT rate on these services in exceptional circumstances, as the European Commission accepts derogations from the Directive upon the request of Member States. 

The reason the EU discourages Member States from applying too many reduced rates is that they are considered ‘inefficient subsidies’. As Cerqua explains:

“In countries with robust mechanisms to distribute wealth, there are more efficient ways to support poor households, mainly by directly subsidising those who need it most (via social security, income tax discounts, or greater allowances). With reduced VAT rates, governments give a general grant to anyone who consumes a given product. This help is larger for the rich, as they are the ones who consume the most.”

So was the backlash against Montero justified?

The answer depends on your political and economic swing, of course. When the Partido Popular (PP) accused Montero of implying that she did not have the power to lower the VAT on electricity, the Ministry of Finance was swift to retaliate, stating that the PP had “misrepresented the words of the minister and taken advantage of them to promote fake news in Brussels.” In some regards, both sides were stooping to each other’s level. But the heated exchange illustrates that tax law is going to remain an especially divisive topic during the pandemic, and that the VAT on electricity and gas in Spain is not likely to change any time soon.

Laurence Crumbie

Laurence Crumbie is a writer from the UK based in Estepona. Before joining the Olive Press he worked as a freelance travel journalist in Myanmar, where he lived for two years.
When he isn't planning his next intrepid trip, Laurence is hunting for great green stories, especially local ones, or writing features for the La Cultura section.
If you have a story, please contact him at [email protected].

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