Rishi Sunak makes U-turn over energy bills but was he right first time?

In January, Rishi Sunak voted against Labour’s proposal – first floated in October 2021 – to remove the 5% rate of VAT from household energy bills. A few weeks later, during an economic update in the House of Commons, the then chancellor of the exchequer set out his reasoning.

Such a policy would “disproportionately benefit wealthier households”, he explained. Not only that but it would end up becoming a permanent £2.5bn subsidy at a time when he was painstakingly striving to rebuild the public finances.

As the year went on, Labour floated the VAT cut time and again, proposing to fund it via a windfall tax on oil and gas companies. The government, with Sunak at its heart, repeatedly dismissed the idea.

The wind changes direction fast in politics. Now, as Sunak seeks to catch up with Liz Truss, who appears to be winning the race to be the next prime minister, he has undergone a Damascene conversion.

On Tuesday evening the former Chancellor promised to slash VAT on domestic energy bills after all, assuming Tory members choose him as their next leader. The temporary cut, he said, would save households £160 in a year.

Sunak’s opposite number, the shadow chancellor, Rachel Reeves, was surprised at the change of heart.

The former Chancellor opposed this every step of the way since Labour proposed it in October – whipping Tory MPs to vote against it time after time.

The Tories have nothing to offer.

Labour are winning the battle of ideas in Britain.

— Rachel Reeves (@RachelReevesMP) July 27, 2022

There remains, however, a question mark over whether Sunak was right the first time.

The average dual-fuel tariff is forecast to rise from £1,971 to £3,300 in October, when the next price cap takes effect, hitting 22 million customers directly in the pocket. Factoring in the last price cap rise, bills will have gone up £2,000 in the space of a year.

Of that punishing increase, 90% is down to soaring gas wholesale costs, the Energy and Climate Intelligence Unit points out.

In the context such numbers, the £160 that households would save by not paying 5% VAT on their bills is a pat on the head to soothe a kick in the teeth.

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There is also merit to Sunak’s earlier claim that binning VAT achieves more savings for high energy users, likely to be wealthier people living in bigger houses.

“He called it right then,” said Sue Rathmell, a partner and indirect tax specialist at MHA.

“His U-turn now is more about getting headlines in his efforts to win over the Conservative party than it is to help poorer members of our society.”

She advocated something simpler, more generous energy rebates for those least able to cope with higher bills.

On Tuesday, a report by MPs on the business and energy select committee suggested one way to achieve this. They called on the government to replace the energy price cap with a “social tariff” under which those in fuel poverty get discounted bills. This, they said, could be paid for either through taxation or by better-off bill payers.


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