Spain cuts VAT on electricity until year-end

On 24 June 2021 the Council of Ministers, meeting in extraordinary session, approved Royal Decree-law 12/2021 on urgent measures in energy taxation. Its main measure is to cut VAT on electricity from 21% to 10% until 31 December 2021 for consumers with contracted power of up to 10 kW, provided the average wholesale price in the month before the last day of the billing period exceeded €45 per megawatt hour. Severely vulnerable consumers will have 10% regardless of price and power.

The Government estimates that around 27.7 million households, self-employed workers and businesses benefit from the cut, plus more than 612,000 vulnerable households, and calculates savings of €857.5 million by the end of the year. The measure will apply as soon as the decree-law enters into force after publication in the BOE. It comes at a time of high wholesale prices that has made the electricity bill a concern for families and companies.

What falls and for whom

The VAT reduction depends on two conditions checked on each bill: contracted power and the wholesale market price. If the average price of the reference month is below €45 per megawatt hour, the rate returns to 21% on that bill. For an average household, the Government calculates a saving of around €6 a month, about €36 until the end of the year. The 10% rate also applies to 72.5% of supply contracts of companies and non-household users that meet the power condition.

The legal basis is article 102 of the European VAT Directive, which allows reduced rates for certain supplies, and the proposal was communicated to the VAT Committee on 22 June. It is a temporary, conditional measure, not a structural change in energy taxation, and any extension will depend on how prices evolve.

The suspension of the generation tax

The decree-law suspends, from July to September 2021, the tax on the value of electricity production, which charges generators 7% of their revenue. The tax authorities estimate a cost of around €400 million and say it will not affect the public deficit. As a cost for those who generate, its suspension should be passed on to the final price of electricity.

The Government calculates that this suspension will reduce the bill by between 2% and 3% for households, between 3% and 6% for small and medium-sized businesses and around 6% for large industry. Added to the VAT cut, an average household’s bill would fall by more than 12%. These are official estimates; the real effect will depend on the price of electricity at any moment and on each consumer’s contract.

What to review

Consumers should check on their bills that the VAT applied is the right one: contracted power, billing period and the month’s price. If in doubt, it is worth asking the supplier. Companies should also bear in mind that, if they can deduct VAT, the cut mainly affects cash flow, because input VAT is recovered, and less the final cost.

A temporary cut does not replace energy management: reviewing contracted power, comparing offers, concentrating consumption in the cheapest hours and considering self-consumption remain more lasting levers. This information is general in nature and does not replace advice on each case.

A temporary cut that eases the bill, but depends each month on the price of electricity.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.