Sunak considers cutting VAT on household energy bills

Chancellor Rishi Sunak is considering a cut to the 5 per cent rate of value added tax on household energy bills, in a move which would allow Boris Johnson to deliver a supposed “Brexit dividend” and help families through a tough winter.

Some Conservative MPs have demanded Sunak reduce the VAT rate in his October 27 Budget to show the government is responding to a looming cost of living crisis.

But the chancellor is generally resisting pressure to loosen the purse-strings in a very tight Budget and is wary of the political risks of a VAT cut on domestic energy bills, as well as an annual cost of about £1.5bn.

During the 2016 Brexit referendum campaign, one of Vote Leave’s promises was that “fuel bills will be lower for everyone”. EU rules stipulated that member states could not cut VAT on domestic energy and gas below its current rate of 5 per cent.

“When we Vote Leave, we will be able to scrap this unfair and damaging tax,” Johnson and other Brexiters said in a joint statement. “It isn’t right that unelected bureaucrats in Brussels impose taxes on the poorest and elected politicians can do nothing.”

Government officials briefed on the Budget preparations said that Sunak, who supported Brexit, had looked at reducing the 5 per cent VAT, but that no decisions had been taken. The Treasury declined to comment.

“It would tick two boxes — it reminds people of the benefits of Brexit and shows you’re listening to people,” said one Treasury official who had taken part in many Budget deliberations.

But Sunak is said by colleagues to be anxious about “the pretty big precedent” that would be set if he began cutting VAT — a vital revenue-raiser for the Treasury. The chancellor is trying to reimpose fiscal discipline in his Budget after huge public spending during the coronavirus crisis.

Cutting VAT on energy ahead of the UN COP26 climate summit in Glasgow could also be contentious.

Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, said the move would “increase the effective subsidy we provide for burning gas”.

“It would also cost over £1.5bn a year, with most of the benefit accruing to higher income households,” he added.

But Robert Halfon, Conservative chair of the House of Commons education committee, said cutting VAT would “show we are doing something to help consumers” and honour a Brexit referendum pledge.

He added he would be happy for the VAT reduction to be targeted on poorer households, saying it would be wrong to try to secure environmental objectives “on the backs of working people”. Sir Christopher Chope, a Tory grandee, is also supporting the move.

Jonny Marshall, economist at the Resolution Foundation, another think-tank, said a VAT cut “would not be targeted and would be quite expensive”, adding Sunak could use other mechanisms to help poorer families through the winter.

The government last month launched a £500m fund for councils to help support the less well-off through the cold season. It also assists vulnerable consumers through schemes including the warm home discount and winter fuel payments.

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