Model the temporary 0% VAT on GB domestic electricity

changelog.d/2166.fixed.md

@@ -0,0 +1 @@
+Modelled the temporary zero rate of VAT on domestic electricity in Great Britain from 1 October 2026 to 31 March 2027 (SI 2026/987), with Northern Ireland and gas staying at 5%. VAT on domestic electricity and gas is now charged on the households' own bills (`domestic_energy_vat`), at a new nation-split `gov.hmrc.vat.domestic_electricity_rate` and the reduced rate, instead of on a flat share of total consumption grossed up to receipts. Energy-bill VAT is not grossed up by the survey coverage or the household share of VAT receipts. The ONS domestic fuel and power share of spending now comes out of the reduced-rate share, which leaves at most 0.01% of spending in the generic reduced-rate base in any year since 2006. The bills are taken net of the 5% VAT they were priced at (`gov.simulation.vat.energy_input_price_basis_rate`), so a reform to the reduced rate no longer changes the VAT-exclusive energy base.

docs/engineering/vat-coverage.md

@@ -56,8 +56,8 @@ the calculation below, whenever the dataset it should match changes.
 | Statutory rates | 20% standard, 5% reduced | `gov.hmrc.vat` |
 
 Model year 2024 is the 2024-25 fiscal year. All dataset totals are weighted
-sums from `Microsimulation`, computed with policyengine-uk at this branch and
-policyengine-core 3.33.2.
+sums from `Microsimulation`, computed with policyengine-uk as of #2187 (before
+energy bills were split out, see below) and policyengine-core 3.33.2.
 
 ### Formula
 
@@ -146,11 +146,53 @@ For Enhanced FRS, download `enhanced_frs_2024_25.h5` from the model repository
 `policyengine/policyengine-uk-data-private` at the release tag (for example
 `revision="1.58.0"`).
 
-## Interaction with an explicit energy VAT base
+## Energy bills are not grossed up
 
-A domestic fuel and power VAT base built from `electricity_consumption` and
-`gas_consumption` (PolicyEngine/policyengine-uk#2166) changes what the survey
-coverage applies to. If those energy inputs are already calibrated to an
-aggregate, they should not be divided by the survey coverage again, and the
-reconciled energy part of `reduced_rate_vat_consumption` should come out of the
-base used to derive it.
+VAT on domestic electricity and gas is charged on each household's own bills
+(`domestic_energy_vat`, PolicyEngine/policyengine-uk#2166), and the ONS domestic
+fuel and power share of spending comes out of the generic reduced-rate share.
+Those bills are calibrated to national energy use (NEED), and households bear
+VAT on them in full, so neither factor applies to them:
+
+```
+vat = (standard rate x full_rate_vat_consumption
+       + reduced rate x reduced_rate_vat_consumption)
+      / (survey_consumption_coverage x household_share_of_receipts)
+      + domestic_energy_vat
+```
+
+The electricity and gas inputs are priced at DESNZ Quarterly Energy Prices
+average domestic prices paid, which include VAT at 5%, so `domestic_energy_vat` charges the statutory rates on the
+input divided by 1.05. The divisor is the fixed price-basis parameter
+`gov.simulation.vat.energy_input_price_basis_rate`, not the statutory reduced
+rate, so a reform to a VAT rate leaves the VAT-exclusive base unchanged.
+
+Dividing energy VAT by the household share as well would put part of
+government, charity and exempt-business VAT on electricity bills, and a zero
+rate on domestic electricity would then cost 1/0.7 times the VAT households
+actually pay on it.
+
+With energy split out, the coverage is derived against receipts net of energy
+VAT: coverage = pre-scaling non-energy VAT / (0.7 x (receipts - energy VAT)).
+
+On the same inputs as the derivation above:
+
+| Dataset | Year | Pre-scaling non-energy VAT | Energy-bill VAT | OBR VAT receipts | Survey coverage |
+|---|---|---|---|---|---|
+| Microcosm UK 2024-25 (`f9d1922c`) | 2024-25 | £79.23bn | £1.99bn | £171.0bn (outturn) | 0.670 |
+| Microcosm UK 2024-25 (`f9d1922c`) | 2025-26 | £82.51bn | £2.01bn | £180.2bn | 0.662 |
+| Microcosm UK 2024-25 (`f9d1922c`) | 2026-27 | £84.73bn | £1.40bn | £187.7bn | 0.650 |
+| Enhanced FRS 2024-25, uk-data 1.56.16 | 2024-25 | £109.39bn | £2.35bn | £171.0bn (outturn) | 0.927 |
+| Enhanced FRS 2024-25, uk-data 1.58.0 | 2024-25 | £114.06bn | £2.44bn | £171.0bn (outturn) | 0.967 |
+
+The pre-scaling non-energy VAT is the standard-rated part alone, since the
+generic reduced-rate base is empty once domestic fuel and power is taken out.
+The Microcosm 2024-25 value rounds to the same 0.67 as the derivation above,
+so the parameter is unchanged, and the bound above still holds (0.650 to 0.670
+by receipts, 0.688 by the ready reckoner). With it, total `vat` on Microcosm
+is within 0.1% of 2024-25 receipts and 3.0% below in 2026-27; on Enhanced FRS
+it is 38% (1.56.16) or 44% (1.58.0) above 2024-25 receipts.
+
+To reproduce, run the snippet above on this version and subtract
+`sim.calculate("domestic_energy_vat", year).sum()` from the receipts before
+dividing.

policyengine_uk/parameters/gov/hmrc/vat/domestic_electricity_rate/great_britain.yaml

@@ -0,0 +1,26 @@
+description: VAT rate on supplies of domestic electricity in England, Wales and Scotland. It is the reduced rate except while the temporary zero rate applies.
+values:
+  1994-04-01: 0.08
+  1997-09-01: 0.05
+  2026-10-01:
+    value: 0
+    metadata:
+      reference:
+        - title: The Value Added Tax (Supplies of Domestic Electricity) Order 2026 (SI 2026/987), article 3
+          href: https://www.legislation.gov.uk/uksi/2026/987/contents/made
+        - title: HMRC Revenue and Customs Brief 10 (2026)
+          href: https://www.gov.uk/government/publications/revenue-and-customs-brief-10-2026-temporary-zero-rate-of-vat-for-domestic-electricity-in-great-britain/temporary-zero-rate-of-vat-for-domestic-electricity-in-great-britain
+  2027-04-01: 0.05
+metadata:
+  unit: /1
+  period: year
+  label: VAT rate on domestic electricity, Great Britain
+  reference:
+    - title: Value Added Tax Act 1994, Schedule 7A, Group 1
+      href: https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A
+    - title: The Value Added Tax (Supplies of Domestic Electricity) Order 2026 (SI 2026/987)
+      href: https://www.legislation.gov.uk/uksi/2026/987/contents/made
+  # Liability follows the date the electricity is consumed (Revenue and
+  # Customs Brief 10 (2026)). Day-weighting the fiscal year assumes equal
+  # daily use: FY 2026-27 has 183 days at 5% and 182 at 0%.
+  fiscal_year_blend: true

policyengine_uk/parameters/gov/hmrc/vat/domestic_electricity_rate/index.yaml

@@ -0,0 +1,3 @@
+description: VAT rates on supplies of domestic electricity, by nation.
+metadata:
+  label: VAT rate on domestic electricity

policyengine_uk/parameters/gov/hmrc/vat/domestic_electricity_rate/northern_ireland.yaml

@@ -0,0 +1,14 @@
+description: VAT rate on supplies of domestic electricity in Northern Ireland. The temporary zero rate from 1 October 2026 does not apply there.
+values:
+  1994-04-01: 0.08
+  1997-09-01: 0.05
+metadata:
+  unit: /1
+  period: year
+  label: VAT rate on domestic electricity, Northern Ireland
+  reference:
+    - title: Value Added Tax Act 1994, Schedule 7A, Group 1
+      href: https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A
+    - title: HMRC Revenue and Customs Brief 10 (2026)
+      href: https://www.gov.uk/government/publications/revenue-and-customs-brief-10-2026-temporary-zero-rate-of-vat-for-domestic-electricity-in-great-britain/temporary-zero-rate-of-vat-for-domestic-electricity-in-great-britain
+  fiscal_year_blend: true

policyengine_uk/parameters/gov/hmrc/vat/domestic_fuel_and_power_share.yaml

@@ -0,0 +1,44 @@
+description: Share of household final consumption expenditure that goes on domestic fuel and power (electricity, gas and other fuels). It is subtracted from the reduced-rate share of consumption, because domestic electricity and gas are now taxed from their own bills.
+values:
+  2000-01-01: 0.0213
+  2001-01-01: 0.0203
+  2002-01-01: 0.0197
+  2003-01-01: 0.0189
+  2004-01-01: 0.0215
+  2005-01-01: 0.0219
+  2006-01-01: 0.0263
+  2007-01-01: 0.0259
+  2008-01-01: 0.0299
+  2009-01-01: 0.0305
+  2010-01-01: 0.0309
+  2011-01-01: 0.0291
+  2012-01-01: 0.0319
+  2013-01-01: 0.0323
+  2014-01-01: 0.0275
+  2015-01-01: 0.0274
+  2016-01-01: 0.0264
+  2017-01-01: 0.0249
+  2018-01-01: 0.0258
+  2019-01-01: 0.0264
+  2020-01-01: 0.0286
+  2021-01-01: 0.0290
+  2022-01-01: 0.0351
+  2023-01-01: 0.0363
+  2024-01-01: 0.0283
+  2025-01-01: 0.0279
+metadata:
+  unit: /1
+  period: year
+  label: Domestic fuel and power share of household spending
+  reference:
+    - title: ONS Consumer trends, 04.5 Electricity, gas and other fuels, current prices, not seasonally adjusted (ADFX), release of 30 September 2026
+      href: https://www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/timeseries/adfx/ct
+    - title: ONS, Household final consumption expenditure, domestic concept, current prices (ABQI)
+      href: https://www.ons.gov.uk/economy/nationalaccounts/satelliteaccounts/timeseries/abqi/ukea
+    - title: OBR, VAT ("Around 2.5 per cent of expenditure is taxed at this reduced rate")
+      href: https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/vat/
+  # ADFX / ABQI by calendar year. From 2006 the share is 2.49% or more,
+  # against the OBR's 2.5% reduced-rate share, so domestic fuel and power
+  # accounts for all of it to within rounding and the non-energy remainder
+  # (children's car seats, smoking-cessation products and similar) is too
+  # small to separate from published totals.

policyengine_uk/parameters/gov/hmrc/vat/reduced_rate.yaml

@@ -1,4 +1,4 @@
-description: A reduced rate of VAT applicable to select goods and services (domestic fuel and power).
+description: A reduced rate of VAT applicable to select goods and services, including domestic gas and other fuels. Domestic electricity has its own rate (gov.hmrc.vat.domestic_electricity_rate), so a change to this rate does not reach electricity.
 values:
   1994-04-01:
     value: 0.08

policyengine_uk/parameters/gov/simulation/vat/energy_input_price_basis_rate.yaml

@@ -0,0 +1,21 @@
+description: VAT rate included in the prices used to value the electricity_consumption and gas_consumption inputs. Energy-bill VAT is charged on those inputs net of this rate, so the VAT-exclusive base stays fixed when a reform changes a statutory VAT rate. This describes the input data, not policy; change it only if the inputs are repriced on a different VAT basis.
+metadata:
+  unit: /1
+  period: year
+  economy: false
+  label: VAT rate included in energy input prices
+  derivation: >-
+    The default electricity and gas inputs are NEED kWh consumption valued at
+    DESNZ Quarterly Energy Prices average domestic prices paid (standard
+    electricity table 2.2.4 and gas table 2.3.4, all payment methods, 2024-25),
+    which include VAT at 5%. The VAT-exclusive base is therefore the input divided
+    by 1.05. Reading the statutory reduced rate here instead would make a
+    reform to that rate reprice the inputs (PolicyEngine/policyengine-uk#2189,
+    review finding C1).
+  reference:
+    - title: DESNZ, Annual domestic energy price statistics (Quarterly Energy Prices tables 2.2.4 and 2.3.4, prices include VAT)
+      href: https://www.gov.uk/government/statistical-data-sets/annual-domestic-energy-price-statistics
+    - title: VAT Act 1994, Schedule 7A, Group 1 (reduced rate on domestic fuel and power)
+      href: https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A
+values:
+  2000-01-01: 0.05

policyengine_uk/parameters/gov/simulation/vat/survey_consumption_coverage.yaml

@@ -7,19 +7,22 @@ metadata:
     Calibrated to the certified Microcosm UK 2024-25 national release only
     (policyengine/populace-uk-private, tag
     microcosm-uk-2024-25-national-20261002T230158Z-5c6b3f68, revision
-    f9d1922c). Pre-scaling VAT (standard rate times full_rate_vat_consumption
-    plus reduced rate times reduced_rate_vat_consumption) on that release is
-    0.20 x £396.15bn + 0.05 x £25.02bn = £80.48bn in 2024. OBR VAT receipts
-    for 2024-25 (outturn, March 2026 EFO table 3.8, cash basis) are £170.994bn.
-    80.48 / 170.994 = 0.471 for the product of the two factors; divided by the
-    household share of 0.7 gives 0.67. Across 2024-25 to 2026-27 the product is
-    0.459 to 0.471, and the HMRC ready reckoner (£8.8bn for one point on the
-    standard rate in 2026-27) implies 0.481, so the coverage lies between 0.655
-    and 0.688. On Enhanced FRS 2024-25 the same calculation gives a coverage of
-    0.927 (policyengine-uk-data 1.56.16) or 0.967 (1.58.0), so this value puts
-    VAT on that dataset 38% or 44% above 2024-25 receipts. Re-derive when the
-    dataset it should match changes, with docs/engineering/vat-coverage.md,
-    which lists the inputs, file hashes and per-dataset results.
+    f9d1922c). VAT on household energy bills (domestic_energy_vat) is not
+    grossed up, so the coverage applies only to VAT on other recorded
+    consumption. On that release, pre-scaling VAT on that consumption is 0.20 x
+    £396.15bn = £79.23bn in 2024 (the generic reduced-rate base is empty once
+    domestic fuel and power is taken out), and VAT on energy bills is £1.99bn.
+    OBR VAT receipts for 2024-25 (outturn, March 2026 EFO table 3.8, cash
+    basis) are £170.994bn. Coverage = 79.23 / (0.7 x (170.994 - 1.99)) = 0.670.
+    Before energy bills were split out, the same calculation gave 0.672, so
+    the rounded value is unchanged. Across 2024-25 to 2026-27 the coverage is
+    0.650 to 0.670, and the HMRC ready reckoner (£8.8bn for one point on the
+    standard rate in 2026-27) implies 0.688. On Enhanced FRS 2024-25 the same
+    calculation gives 0.927 (policyengine-uk-data 1.56.16) or 0.967 (1.58.0),
+    so this value puts total VAT on that dataset 38% or 44% above 2024-25
+    receipts. Re-derive when the dataset it should match changes, with
+    docs/engineering/vat-coverage.md, which lists the inputs, file hashes and
+    per-dataset results.
   reference:
     - title: OBR, Economic and fiscal outlook March 2026, detailed forecast tables, receipts, table 3.8
       href: https://obr.uk/efo/economic-and-fiscal-outlook-march-2026/

policyengine_uk/tests/policy/baseline/gov/hmrc/vat/domestic_energy_vat.yaml

@@ -0,0 +1,55 @@
+# Temporary GB zero rate on domestic electricity, 1 October 2026 to
+# 31 March 2027 (SI 2026/987). £1,050 of bills carries £50 of VAT at 5%.
+# FY 2026-27 has 183 days at 5% and 182 at 0%: 50 * 183 / 365 = 25.07.
+- name: GB electricity in FY 2026-27 is zero-rated for 182 of 365 days
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    region: WALES
+    electricity_consumption: 1_050
+    gas_consumption: 0
+  output:
+    domestic_energy_vat: 25.07
+
+- name: Northern Ireland electricity stays at 5%
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    region: NORTHERN_IRELAND
+    electricity_consumption: 1_050
+    gas_consumption: 0
+  output:
+    domestic_energy_vat: 50
+
+- name: Gas is not affected by the electricity zero rate
+  period: 2026
+  absolute_error_margin: 0.01
+  input:
+    region: SCOTLAND
+    electricity_consumption: 0
+    gas_consumption: 1_050
+  output:
+    domestic_energy_vat: 50
+
+- name: GB electricity is back at 5% in FY 2027-28
+  period: 2027
+  absolute_error_margin: 0.01
+  input:
+    region: LONDON
+    electricity_consumption: 1_050
+    gas_consumption: 0
+  output:
+    domestic_energy_vat: 50
+
+- name: Energy VAT adds to VAT without the coverage or household-share gross-up
+  period: 2025
+  absolute_error_margin: 0.01
+  input:
+    region: LONDON
+    consumption: 0
+    electricity_consumption: 1_050
+    gas_consumption: 1_050
+  output:
+    reduced_rate_vat_consumption: 0
+    vat: 100
+    vat_change: 0