Rush to beat VAT on fuel 'could cost pounds 100m in lost tax'

THE GOVERNMENT last night gave the green light to the payment of fuel bills in advance to avoid VAT - in the face of a Labour warning that it could cost the Treasury pounds 100m in lost tax.

The pre-payment scheme could also have the unwelcome side-effect of preventing a further reduction in interest rates.

Labour condemned the development amid evidence that more than 200,000 domestic users have joined the dash to avoid the tax, paying about pounds 120m in advance to power companies. Tens of thousands more are expected to follow suit as the 1 April deadline for the introduction of the 8 per cent tax - 17.5 per cent from next year - approaches.

Responding to a Labour charge that the prepayments amount to a 'windfall' for the gas and electricity companies, Sir John Cope, the Paymaster General, accused the party of seeking to revive its 'windfall tax' proposals for public utilities. He said: 'If you stock up with coal or buy gas and electricity in advance of VAT you will avoid the tax just as someone does who buys alcohol or tobacco before a Budget.'

However, Gordon Brown, the shadow Chancellor, said: 'The system benefits those who have money. It gives no benefit to those who are poor.' He called for the energy industry regulators to look into the unexpected profits.

The criticisms follow a Press Association survey at the weekend showing that moves by consumers to avoid the controversial levy began in earnest during the last few weeks. Downpayments range from pounds 50 to as much as pounds 6,000.

Simon Briscoe of the merchant bank S G Warburg said: 'A figure of pounds 1bn would not surprise me at all.' That would equate to the loss of about pounds 100m in VAT revenues. Labour also raised the spectre of adverse effects on prospects for a further early cut in interest rates. Building societies are already suffering record levels of withdrawals as savers seek more lucrative returns. They have admitted the pre-payments are a likely factor in the withdrawals. The outgoings help create a shortage of savers. The societies are likely to face difficulty in attracting new savers to replace them if interest rates fall further.