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HMRC internal manual

VAT Fuel and Power


This book gives guidance to HMRC assurance officers on the VAT treatment of supplies of fuel and power. It should be read in conjunction with VAT Notice 701/19:Fuel and power.

The relevant legislation for the reduced rate of VAT for supplies of fuel and power is:

  • the VAT Act 1994, section 29A; and
  • the VAT Act 1994, Schedule 7A, Group 1.

The VAT policy team that is responsible for the development and maintenance of policy relating to supplies of fuel and power is the VAT Reliefs Team. They review areas where policy needs to be clarified or has not been determined. They also defend appeals that challenge our policy or legislation, write and maintain notices and guidance, and provide technical advice to ministerial teams on our policy areas that may be conveyed to ministers.

The VAT Advisory Team is responsible for giving advice on cases:

• where the guidance is unclear

• where there is a challenge to the law

• which involve new products and services

• which are politically sensitive or of national importance

• where guidance has specified that we must be consulted

Before submitting a General or Technical Advice Request (GAR) or (TAR) to the VAT Advisory Team for assistance on liability issues relating to Fuel and Power, please make sure that you have read this guidance and VAT Notice 701/19: Fuel and power, and have looked at the “Getting advice” pages of the VAT website.

Why supplies of fuel and power to most businesses are standard-rated

When VAT was introduced in the UK in 1973, most supplies of fuel and power were zero-rated. In 1978, when the EC 6th VAT Directive (77/388/EEC) was adopted, member states were permitted to retain zero rates that were in place in 1975, provided that there was a clearly defined social reason and that the supply was for the benefit of the final consumer.

Article 28(2) stated: Reduced rates and exemptions with refund of tax paid at the preceding stage [zero rates] which are in force on 31 December 1975 and which satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive may be maintained …

Article 17 of the 2nd Directive of 1967 stated: … Member States may … provide for reduced rates or even exemptions with refund, if appropriate, of tax paid at the preceding stage, where the total incidence of such measures does not exceed that of the reliefs applied under the present system. Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer …

But, in continuing to zero rate supplies of fuel and power (among other things) to businesses, the European Commission considered that the UK was in breach of its obligations, and started infraction proceedings. The case was heard by the European Court of Justice (ECJ) in 1988 (case 416/85), who said:

Under the general scheme of VAT the final consumer is the person who acquires the goods and services for personal use, as opposed to an economic activity, and thus bears the tax. It follows that having regard to the social purpose of Article 17 the term “final consumer” can be applied only to a person who does not use exempted goods or services in the course of an economic activity.

The provision of goods or services at a higher stage in the production or distribution chain which is nevertheless sufficiently close to the consumer to be of advantage to him must also be considered to be for the benefit of the final consumer as so defined.

Thus the Court upheld the Commission’s allegation that the UK’s zero-rating of fuel and power was too wide in its scope. As a consequence, zero-rating of fuel and power became restricted to supplies for qualifying use (see VFUP2200). Qualifying use is interpreted as meaning domestic use (VFUP2300) and use by a charity otherwise than in the course or furtherance of a business (VFUP2400) with effect from 1 July 1990.

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Why supplies of fuel and power for qualifying use are reduced-rated

Article 113 of Directive 2006/112 (formerly Article 28(2)(b) of the EC 6th VAT Directive) permits member-states to apply a reduced rate to goods and services that were previously zero-rated (among other things). Article 99(1) of Directive 2006/112 (formerly Article 12(3)(a) of the EC 6th VAT Directive) states that a reduced rate may not be less than 5%.

In Budget 1993, the then government announced that zero rating of supplies of fuel and power for qualifying use would cease with effect from 1 April 1994. From this date a transitional reduced rate of 8% VAT was introduced.

This was to have been replaced by the standard rate of 17.5% on 1 April 1995; but following a procedural vote on Budget 1994 the planned increase to 17.5% did not go ahead.

The rate was reduced to the minimum of 5% with effect from 1 September 1997.