Rishi Sunak promises to cut VAT from energy bills in cost of living crisis U-turn

One-year tax holiday worth £160 to households as costs predicted to soar by more than £1,000

Rishi Sunak has promised to temporarily scrap VAT on domestic fuel bills if he becomes prime minister, despite opposing the move for months while chancellor.

Labour has long called for the levy to be lifted as the cost of living crisis bites millions of families. But Mr Sunak voted against the move in January, and in February told the House of Commons it would “disproportionately benefit wealthier households”.

He later said it would be “silly” to offer additional help with bills ahead of an Ofgem decision on the energy price cap in October.

Mr Sunak’s U-turn – worth £160 a year to the average household at a cost of £4.3bn to the Treasury – is a bid to counter the appeal of Tory leadership rival Liz Truss, whose £30bn package of tax cuts promises has helped her build a commanding lead in polls of party members.

She denounced Mr Sunak’s national insurance rise as “morally wrong” last night in the early moments of the abandoned TalkTV debate.

Labour Treasury spokesperson Pat McFadden said Mr Sunak, who also adopted Labour’s windfall tax on energy companies after months of opposing it, seemed once again to be “acting as his own personal rebuttal unit”.

Meanwhile, a second element of the former chancellor’s “winter plan” came under fire from work and pensions secretary Therese Coffey.

Mr Sunak said he would encourage more people off benefits by doubling from 9 to 18 the number of hours claimants must work to avoid the requirement to look for a full-time job.

But Ms Coffey, a supporter of the Truss leadership bid, said her department had hoped to increase the threshold to 12 hours earlier this year, but “unfortunately was blocked by the chancellor”.

The former chancellor earlier this year announced a £400 grant for all households – and up to £1,200 for the most vulnerable – to help with energy bills, after regulator Ofgem increased the price cap on an average home by £700 to around £2,200.

Now there are fears that the cap will soar to as much as £3,250 when it is recalculated by the regulator this autumn.

The chief executive of energy giant E.ON, Michael Lewis, called on whoever becomes prime minister to intervene to help poorer households with their bills, warning that cash would be better targeted at welfare claimants than through general taxation.

“We expect bills to be above £3,000, up to £3,200 come the next price cap in October,” Mr Lewis told Channel 4 News. “What we need to see is more government intervention to compensate for that increase in wholesale prices.

“The kind of increases we’re seeing now are unprecedented in my 30 years in the energy industry, I’ve never seen anything like it. And I think we’re going to have to see more government intervention to help customers ride through this extraordinary peak in wholesale prices

“What we need to see is help for the poorest people in our society. That means it needs to be focused on people who are struggling to pay. The intervention they announced earlier, namely a payment for people on universal credit, is probably a better way of doing it.”

Mr Sunak said that his 12-month VAT holiday would be dependent on Ofgem lifting the price cap above £3,000 a year, and would come into effect from 1 October in that case.

“Tackling inflation and getting people the support they need to help with the cost of living is critical,” said the former chancellor. “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.”

But Mr McFadden said: “Will the real Rishi Sunak please stand up? Once again he’s acting as his own personal rebuttal unit – attacking a policy for months then adopting it.

“Not content with playing hokey cokey with our taxes as chancellor, he’s devised a poor imitation of the windfall tax Labour called for, and now he wants to cut VAT on energy bills.

“It’s like he’s forcing himself to do dodgy cover versions of a band he insists he always hated.

“This is just another example of the Tory party trying to cling on despite 12 years of continuous failure, when the truth is they are out of time and out of ideas.”

Mr Sunak said he would also look at new incentives to support older workers to return to the labour market, to counter the so-called “great resignation” following the Covid pandemic.

And he said he would seek to reduce the traffic chaos seen at Dover in recent weeks by working with the UK’s biggest importers to build up trade with Dutch and Danish ports.

Liberal Democrat Treasury spokesperson Sarah Olney said: “This sounds like another Sunak swindle. His tax hikes alone have cost families four times as much as this measly plan would ever save them.

“It is proof that both Sunak and Truss are out of touch and out of ideas. All they can offer is half-baked policies which won’t save people from the frankly frightening rise in energy bills this winter.”