Government halves value-added tax on electricity bills

A FRESH reduction in value-added tax (IVA) on electricity has been announced in a bid to reduce costs to Spanish households, taking effect from Saturday this week (June 25).

Until earlier this year, IVA on the mains utility was at the maximum of 21%, the standard rate that applies to most goods and services in the country other than certain basics which attract the mid-range rate of 10% or bottom level of 4%.

Amid soaring costs of fuel worldwide, Spain's government opted to reduce IVA on electricity to 10%, offering some relief to households and small businesses, but as the price of power continues to escalate, it has now decided to cut the rate to 5%.

President Pedro Sánchez and his cabinet have long been looking at ways to reduce energy bills – and fuel across the board – given that this is causing spiralling price-led inflation.

Supermarket bills are now approximately 30% higher than in autumn 2021, largely as a result of more expensive fuel – electricity used by stores and in the production and manufacturing stages, and petrol and diesel for transporting goods, are being passed onto the consumer.

This is especially the case where adverse winter and early-spring weather conditions have affected local crops, leading to these having to be shipped in from other parts of the country.

In terms of fiscal measures, reducing IVA is the government's only weapon left against rocketing electricity bills, now that it has also cut tax on other elements of household energy – otherwise, consumers are at the mercy of wholesale power prices dictated by the cost per barrel of crude oil.

If these wholesale prices continue to rise globally, they could wipe out the effect of the IVA reduction, but in the meantime, the latter will at least help contain consumers' bills and stop them getting any higher.

Meanwhile, the next three years will see Spain's main electricity board investing heavily in wind power, gradually increasing the percentage of energy supplied to the end user from renewable sources that are not subject to the same price volatility as fossil fuel, nor have to be sourced from overseas territories which could be vulnerable to political and climate upheaval.

In practice, the IVA cut from 10% to 5% will not make a massive difference to households, especially when considering the cost to the government of implementing the move – between €430 and €430 million over the next three months – but the accrued saving will prove beneficial.

According to the National Markets and Competition Commission (CNMC), an average household, taken as being one with two to four members, will be paying approximately €18.60 a month less on electricity than they would have been if IVA was still at 21%.

Before the first rate cut from 21% to 10%, at current prices, the average bill for a 31-day month based upon a consumption of 270 kilowatts per hour (kwH) and a power level of 4kw would have been €109.60, if their supply was direct from national energy board Iberdrola and not through a private-sector commercial retailer.

This would have reduced to €95.43 as a result of the IVA cut to 10%, and if the rate had been at 5%, the monthly bill would have come in at €91 exactly.

The average household will therefore save around €4.40 a month thanks to the IVA reduction to 5%, although those with a higher-than-average consumption – perhaps in hotter parts of Spain where air-conditioning is a standard fixture and running at a greater rate, or where they have a swimming pool pump constantly in operation, or large amounts of cooking and washing – and also small business premises such as restaurants, bars, bakeries and grocery shops with refrigerator and freezer cabinets will benefit more from the cut.

This latest IVA reduction comes after Spain's government opted to cap gas prices which, as well as reducing bills for consumers who use bottled gas or, where it is available in their area, mains gas, was also supposed to help reduce electricity bills, given that some electrical power is produced from gas.

But this price limitation turned out to have little or no effect on electricity bills, forcing the government to consider its last remaining options.

So far, a reduction in 'special tax' on electricity from 5% to the minimum legally permitted of 0.5%, plus a temporary scrapping of tax on electricity production brought in exactly a year ago, have been applied and, if these are extended for the next three months to coincide with the IVA reduction – as seems likely – the total cost to the State will be between €1.36 and €1.45 billion.

Households which benefit from the so-called 'electricity social benefit', or bono social, aimed at those on a lower income and administered through the power provider, will also get a reduction in IVA on the part of their energy bills they pay after their discount is applied.

Other fuel-related measures Spain's government has taken to try to contain end-user costs include a discount of 20 cents per litre on petrol.

This is either applied at the till – upon paying for €20 of petrol, the customer will be charged around €18.20 instead – or at the pump where, after paying for €20, the price indicator on the screen will show a purchase of €22 whilst filling.

With petrol now at over €2 a litre for the first time in history, the State-funded 20-cent discount per litre – which some mainstream service station companies have topped up with an additional five cents per litre of their own – travelling is still far more expensive than it was a year ago, and road-haulage transport workers have been calling for extra measures.

A high number of lorry drivers in Spain are self-employed, and are pushing for a fuel discount of 40 cents per litre – double the existing reduction – plus a one-off annual payment of €1,250 to help offset their rising costs.