They have seen the future and it's Vatless: People are queueing up to pre-pay their fuel bills

ONE householder in Liverpool has just paid pounds 10,000 in advance to cover his gas bills for the foreseeable future. Another, in the South of England, has bought the equivalent of 18 years' electricity usage. A third, in the North-west, has paid the next 21 years' electricity bills.

In the past few weeks, thousands of people have withdrawn hundreds of millions of pounds from building societies and banks to pre-pay their fuel bills and so avoid VAT. From Friday, VAT at 8 per cent will be levied on domestic fuels - gas, electricity, coal and oil. In April 1995 this will rise to 17.5 per cent. This week the rush to beat the deadline will turn into a stampede.

But is this wise? And is it ethical? Gordon Brown, the shadow Chancellor, last week condemned pre-payment as deeply unfair because only those with money can afford to take advantage of it. British Gas has already found that many more customers in the North Thames and Southern areas are pre-paying their bills than in the less well-off North.

To give an idea of the scale of the phenomenon: by 18 March, 140,000 or 0.7 per cent of British Gas's 18 million customers had pre-paid pounds 100m. Payments averaged between pounds 500 and pounds 800 and cover the cost of about a year's supply of gas. By the same date, South Western Electricity had received some pounds 18m in pre-payments averaging pounds 455 from 39,500 customers. Seeboard in Brighton has taken more than pounds 51m in pre-payments and its staff are 'besieged' with phone calls from customers asking about VAT. One office which normally takes 18,000 calls a week is currently taking 32,000.

By 19 March, Manweb in Chester had taken pounds 14.5m in pre-payments from 39,000 customers. Norweb in Manchester had taken pounds 18m from 35,000 customers. The average was pounds 500- pounds 600 but some were pounds 5,000- pounds 6,000. As of 21 March, London Electricity had taken pounds 6m pre-payments from 18,000 customers and British Gas in Scotland pounds 3m from 6,000.

So plenty of people are doing it. But how do you go about it? The deadline for pre-payment is Thursday. But the situation is complicated because individual power companies have set different rules about when and how they will accept pre-payments. If you live in the South Western Electricity region, your cheque must arrive by 30 March, or you will have to go into a SWEB office or showroom on Thursday and pay in cash and get a receipt. Manweb, serving Merseyside, Cheshire and North Wales, will accept payment up to 31 March but advise payment by 28 March. Norweb, serving the North- west, asked customers to ensure that their cheques were in by last Friday, but cash payments can be made on 31 March.

Procedures for pre-payment also vary. British Gas, for example, which will accept cash or cheques up to and including 31 March, requires customers to write a note to their local billing centre quoting their account number and saying that they want to put their account into credit by so much money.

London Electricity, on the other hand, asks customers who pay their bills quarterly to cross out the usual amount, insert the sum they wish to pay, attach a cheque with the account number on the back, and send it to the billing centre. Customers not billed in the next few days can send a cheque and a note saying what they want to do.

Estimates of the size of future bills can be made by averaging out the past couple of year's bills. The average annual household electricity bill, for example, is about pounds 300, and the gas bill of an average three-bedroom house with gas central heating is about pounds 383.

It is also possible to ask for some of your advance payment back at a later stage if you need the money. You can have back whatever has not already been spent on fuel consumption.

But is it wise to pre-pay? One major caveat is that the credit is only applicable to your current home. If you move while you are still owed credit, this will not be transferable. It will merely be refunded without interest. Second, the energy companies will not advise you as to the wisdom or otherwise of prepayment. They will only explain how you can about it.

Colin Szwed, senior manager of Ernst and Young's financial management department in Birmingham, said that, as most of the people who can afford to pre-pay their bills tend to be higher-rate taxpayers, an 8 per cent VAT saving is the equivalent of a 13.3 per cent return on your money. Even for a standard-rate taxpayer, the return is 8 per cent.

In the second year of prepayment, when VAT rises to 17.5 per cent, Mr Szwed says the return gets even better. However, he says, by year three or four you would be probably better off with the money in a building society account.

Interest rates are currently at a 17-year low. They could start rising again however, and begin to make pre-payment a less attractive short-term option. Mr Szwed also warns that an incoming Labour government in two or three years' time could also decide to abolish VAT on fuel. But tellingly, he adds that he knows a lot of accountants who are pre-paying.

Simon Hinde, a senior editor at Which, said that in the short term there is not much doubt that pre-payment is a sensible way of using money compared with putting it into a building society.

In the longer term, however, pre-payment is more of a gamble. Interest rates could rise. You might die. Even the present Conservative government might decide in six months' time to reclaim VAT retrospectively, having concluded that it was losing too much revenue. If you are looking at ways of investing money over a 5- to 10-year period there are many other things which might be a better investment. For example, unit trusts, investment bonds, gilts, bonds and shares.

As an example of what you might save in the short term if you pre-pay bills rather than leave the money in a building society, the Nationwide society has done some calculations. Based on a net average interest rate of 3.825 per cent on an instantly accessible account, an average household spending pounds 680 a year on energy bills would save pounds 37.83 in the first year by pre-payment. That is the difference between VAT saved and interest lost. In the second year, having paid pounds 1,360 for two years' bills, you would save pounds 112.21. Paying four years, in advance, i e pounds 2,720, would save pounds 168.08.

Even though the government will lose a huge amount of tax revenue - pounds 100m has been mentioned - a Customs and Excise spokesman said this pre- payment tax avoidance is not a mistake, nor an oversight nor necessarily a loophole. Customs did look at changing the law in order to prevent pre-payment tax avoidance but, as pre-payment of bills is quite a common feature of business life, it would have been hard to make changes without causing disruption.

'We decided we would simply have to live with the fact that a number of people would avoid VAT on power and heating until the pre-payment money ruins out,' he said. 'It's a fact of life. The situation was predicted. It's not a cock-up.'

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