Rishi Sunak could slash VAT on household energy bills in the Budget to ease the cost of living crisis, it was claimed today.
The Chancellor is believed to be considering reducing the 5 per cent rate even though he has very little room for manoeuvre in the financial package on October 27.
As well as relieving some pressure on struggling families, the move could allow Boris Johnson to hail a Brexit benefit, as VAT rates are set centrally within the EU.
With speculation starting to mount in the run-up to the Budget, Mr Sunak is also said to be keen to push ahead with an online sales tax after shelving plans for an overhaul of business rates.
Energy bills have been soaring after wholesale prices for natural gas spiked, forcing a slew of smaller suppliers to collapse.
The government’s cap on prices for households has already increased and is set for another eye-watering rise in April.
Tory MPs have been urging Mr Sunak to act on the burden, which comes alongside a range of other inflationary stresses, with warnings many people will face choices between ‘eating and heating’ this winter.
During the Brexit referendum campaign in 2016 Vote Leave pledged that ‘fuel bills will be lower for everyone’, pointing out that EU rules meant VAT on domestic energy had to be at least 5 per cent.
Government officials briefed on the Budget preparations told the Financial Times that reducing the level was on the table but no final decisions had been taken.
‘It would tick two boxes — it reminds people of the benefits of Brexit and shows you’re listening to people,’ one Treasury official said.
However, Mr Sunak has been adamant that the government must rein in spending and the move would cost the Exchequer around £1.5billion a year.
It would also be politically difficult ahead of the COP26 summit, where Mr Johnson is begging world leaders to up the pace towards Net Zero.
Paul Johnson, director of the respected Institute for Fiscal Studies think-tank, said reducing VAT 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.
Meanwhile, the Telegraph said Treasury officials have intensified work on a new online sales tax designed to help level the playing field between firms like Amazon and high street retailers.
Mr Sunak is not expected to go ahead with a long-awaited overhaul of business rates in the Budget, dashing the hopes of many retailers who have been hammered by the pandemic.