Can the VAT rate on Electricity be Reduced?

Sinn Féin suggested recently that the VAT rate on electricity, currently at 13.5%, be temporarily removed to ease the burden on households over the winter. The government have claimed that they can't do that due to EU law. In this post, I will take a quick look at the VAT Directive and try to establish what is actually permitted. 

First of all, there is no doubt that the minimum vat rate allowed is 5%, so that rules out a complete removal of vat :

"The reduced rates shall be fixed as a percentage of the taxable amount, which may not be less than 5 %". 

Next, Article 118 states that certain services cannot go below 12% and this was referred to by the government as applicable to electricity. As electricity comes under Annex 1, it would seem that the government is correct (- -but wouldn't 12% be better than no reduction ? ) :

" Article 118

 Member States which, at 1 January 1991, were applying a reduced rate to the supply of goods or services other than those specified in Annex III may apply the reduced rate, or one of the two reduced rates, provided for in Article 98 to the supply of those goods or services, provided that the rate is not lower than 12 %". 

However, something that has been noticed before is that there is often a grey area with EU law. Article 102 deals specifically with the supply of energy, including electricity and allows for either of the two reduced rates to be applied. In the case of Ireland, the two reduced rates are 13.5% and 9% (for hotels) :

"Article 102

After consultation of the VAT Committee, each Member State may apply a reduced rate to the supply of natural gas, electricity or district heating"

It is remarkable that no reference is made here to the minimum rate of 12%, but as article 102 precedes 118, perhaps it is inferred that 102 can be relied upon alone in relation to electricity. In that case, surely, a reference to the exception under 102 should have been made in 118. 

I am no legal expert and perhaps someone can comment below on what they think. 

We can test the legal recipes in the EU VAT directive by the results. And here, it would seem to be the case that when we look at other European countries, the vat on electricity can be reduced to a minimum of 5%.

- - Portugal reduced the vat on electricity to 6% for low usage households in 2019. Initial figures show that the reduced rate applies to about 42% of customers with the rest paying vat at the higher rate of 23%.

- - Spain have introduced a temporary reduction to 10% for low usage customers until December 2021. After that, the vat will revert to the normal 21% rate. It is estimated that the vast majority of households and businesses will qualify for the reduced 10 % rate. 

- - Italy have a fixed vat rate of 10% on electricity. This proves that the minimum rate of 12% does not apply to electricity as per article 102 . Applying the Italian model to Ireland would mean we could reduce our vat rate to 9% on electricity. 

- - Greece have a super reduced vat rate of 6% on electricity since 2019. This also applies to medicine and vaccines as well as children's books. Their normal reduced rate is 13 % which applies to hotels. It is interesting to see that in Ireland we seem to have our priorities completely wrong with hotels regarded as more essential than electricity. 

- - The UK had along with Malta the lowest vat rate on electricity in the EU with a rate of 5%. One of the reasons for brexit is that they were not able to reduce it to zero. 

- - Luxembourg have a vat rate of 8% on electricity. 

It seems clear that the vat rate on electricity can be lowered to at least 9%. But the government have chosen the spending option as usual which means additional handouts to struggling families. Which in turn will lead to a cycle of inflation as bills rise even more.