Sunak considers reducing value-added tax on household energy bills

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Chancellor Rishi Sunak is considering cutting 5 per cent value-added tax on household energy bills, in a move that would allow Boris Johnson to deliver the “Brexit dividend” and help families through the harsh winter.

Some Conservative MPs have called for Sunak to lower the value-added tax rate in the October 27 budget to show the government is responding to the looming cost of living crisis.

But the chancellor has generally resisted pressure to loosen fiscal constraints in a very tight budget, and is wary of the political risks of cutting value-added tax on local energy bills, as well as the annual cost of around £1.5 billion.

During the 2016 Brexit referendum campaign, one of the holiday voting promises was that “fuel bills will be lower for everyone”. EU rules stipulate that member states cannot reduce value-added tax on domestic energy and gas below the current rate of 5 per cent.

“When we vote to leave, we will be able to repeal this unfair and harmful tax,” Johnson and other Brexiteers said in a joint statement. “It is not right that the unelected bureaucrats in Brussels taxing the poorest elected politicians cannot do anything.”

Government officials briefed on budget preparations said Sunak, who backed Brexit, had considered a 5 per cent value-added tax cut, but no decisions had been taken. The Treasury Department declined to comment.

“It will tick two boxes – it reminds people of the benefits of Brexit and shows you are listening to people,” said one Treasury official who has been involved in many of the budget deliberations.

But Sunak’s colleagues said he was concerned about the “fairly large precedent” that would be set if he began cutting value-added tax – a vital revenue-raising source for the Treasury. The chancellor is trying to reimpose fiscal discipline in his budget after massive public spending during the coronavirus crisis.

Reducing the value-added tax on energy ahead of the UN’s COP26 climate summit in Glasgow could be controversial.

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

“It would also cost more than £1.5 billion a year, with most of the benefits accruing to higher-income families,” he added.

But Robert Halfon, the Conservative chair of the House of Commons education committee, said the value-added tax cut “would show we are doing something to help consumers” and deliver on a Brexit referendum pledge.

He added that he would be happy to target VAT reductions on poor families, saying it would be a mistake to try to secure environmental targets “on the shoulders of workers”. Sir Christopher Chubb, of the Conservative Party, also supports the move.

The VAT cut “would not be targeted and would be very costly,” said Johnny Marshall, an economist at Resolution, another think-tank, adding that Sunak could use other mechanisms to help poor families during the winter.

Last month the government launched a £500m fund for councils to help the less affluent during the cold season. It also helps vulnerable consumers with schemes that include the warm home deduction and winter fuel payments.

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