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Rishi Sunak vows to cut VAT on household energy bills

Tory leadership hopeful and former chancellor Rishi Sunak. Photo: Reuters/Toby Melville
Tory leadership hopeful and former chancellor Rishi Sunak. Photo: Reuters/Toby Melville (Toby Melville / reuters)

Conservative leadership hopeful Rishi Sunak has pledged to temporarily scrap the 5% value added tax (VAT) rate on all domestic energy bills for the next year, if he becomes prime minister.

Sunak, who lags behind rival Liz Truss in the race to become the UK’s next PM, pulled a U-turn on tax cuts despite previously condemning the policy.

The former chancellor of the exchequer said the VAT cut, part of his "Winter Plan", would help households with inflation and the cost of living, saving the average household £160 ($193).

He said: "Tackling inflation and getting people the support they need to help with the cost of living is critical.

"That’s why, with the price cap expected to rise above £3,000 in October, I will move immediately to scrap VAT on everyone’s domestic energy bills for the next year, saving the average household £160.

"This temporary and targeted tax cut will get people the support they need whilst also – critically – bearing down on price pressures.

"As chancellor I knocked £400 off everyone’s energy bill and provided support of £1,200 for the most vulnerable households. This additional VAT cut will help deal with the current emergency."

Read more: Sunak and Truss's tax plans: What Tory leadership results will mean for your income

In comparison, Truss, whose campaign team condemned Sunak's move, has promised £30bn in immediate tax cuts, including reversing the rise in National Insurance contributions rates, at a cost of £13bn per year – something Sunak says would be inflationary.

UK families have been facing the tightest squeeze on household budgets since 1970s as prices surge at the fastest pace in 40 years.

April's 54% energy price cap jump saw average bills rise by £693 a year for around 18 million households on standard tariffs, and £708 for 4.5 million prepayment customers.

Prices are forecast to rise to more than £3,200 in October when the Ofgem cap is next reviewed.

Economists have said a temporary VAT cut would be more beneficial for those who face the highest rise in energy bills as opposed to the poorest households who struggle to deal with rising costs.

Stuart Adam, a Senior Economist at the IFS, said: "If the energy price cap rises to the level currently forecast and stays there for a year, removing the 5% VAT component for 12 months would save a typical consumer £154 and cost the exchequer £4.3bn initially.

"By providing more support to those whose use more energy, it would be well targeted at those who face the biggest rise in their energy bills, but not at those – the poorest – who are least able to cope with the rise in costs.

"As a permanent policy, removing VAT on energy bills would be a move in exactly the wrong direction: distorting households’ choices towards more energy use, making it harder to meet the UK’s ‘net zero’ targets and meaning that any reduction in emissions happened in a way that was more costly overall to households than it need be."

Read more: Energy bills: MPs warn £400 discount not enough to mitigate October rise

Sunak's new vow came as analysis from the Resolution Foundation suggested personal tax cuts, such as those being promised by Truss, are "not a serious answer", to tackle the rising cost of living.

"Rising energy bills will bite hardest for low- and middle-income households this winter, but only 15% of the cost of scrapping the national insurance rise would go to the poorer half of the population, while 28% would go to the top 20th," the thinktank said.

Meanwhile, a new Business, Energy and Industrial Strategy (BEIS) committee report flagged issues with the support Sunak had promised to households while chancellor.

In May, Sunak announced a £15bn support package for households struggling with energy bills.

The package gave £400 energy bill discounts to all households, £650 to another 8 million low-income households, £150 for those on disability benefits and £300 for pensioners.

If elected leader, Sunak also pledged to undertake major supply side reforms aimed at reducing costs, expand the labour force by doubling the number of hours someone on welfare has to work a week to avoid having to look for a full time job, and new incentives to help inactive older workers return to the workforce.

Watch: Why are gas prices rising?