VAT energy bills: Rishi Sunak pledges to scrap tax in shock U-turn

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The move, which is part of the Tory lead candidate’s “winter plan” to tackle inflation and the cost of living crisis, would save the average household £160.

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However, critics accused Mr Sunak of a “flip-flop”, citing his frequent condemnation of his opponent Liz Truss’ promises of unfunded tax cuts – which he previously described as “comforting fairy tales”.

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Meanwhile, the former Chancellor’s campaign team said his pledge “contrasted with the inflationary £55billion in fiscal commitments made by Ms Truss”.

So what did Mr Sunak promise, what was the response and what is the current VAT rate on energy bills?

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Here’s what you need to know.

Rishi Sunak has pledged to eliminate VAT on energy bills

What did Rishi Sunak promise on energy bills?

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Mr Sunak has unveiled plans to remove VAT from domestic energy bills for a year if the price cap – which currently stands at just under £2,000 a year for the average home – exceeds £3,000, experts predict.

The Richmond MP said: “Tackling inflation and supporting the people who need it to help with the cost of living is vital.

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“As the price cap is expected to rise above £3,000 in October, I will therefore move immediately to eliminating VAT on everyone’s household energy bills for next year, saving the average household £160.

“This temporary and targeted tax cut will give people the support they need while also — critically — alleviating pricing pressures.”

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Mr Sunak slammed Ms Truss’ promises of tax cuts as “comforting fairy tales”.

Mr Sunak also pointed to a similar decision he made while serving as Chancellor of the Exchequer under Boris Johnson.

He added: “As Chancellor I saved £400 off everyone’s energy bill and supported the most vulnerable households with £1,200.

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“This additional VAT reduction will help address the current emergency.”

Mr Sunak previously dismissed Labor calls for a VAT cut on energy bills, saying “the policy would benefit wealthier households disproportionately” and “there was no guarantee suppliers would pass the rebates on to all customers”.

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As well as scrapping VAT on all domestic energy bills, the hopeful Tory leadership also said they would implement sweeping supply-side reforms to bring down costs.

What was the criticism?

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Critics have suggested Mr Sunak’s pledge was only due to Ms Truss’ promises of tax cuts – which some believe is the reason she is ahead in the polls.

A YouGov poll, conducted after the two repeatedly clashed over taxes in the BBC’s leadership debate on Monday (25 July), found 50% of Tory members thought Ms Truss did better – compared to 39% for Mr. Sunak.

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When it comes to managing the cost of living, 55% thought the foreign minister was better, versus 34% for the former chancellor.

Business Minister Kwasi Kwarteng, a senior ally of Ms Truss, claimed Mr Sunak’s about-face shows he is under pressure in the prime ministerial race.

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He told Times Radio: “I think he’s under a lot of pressure.

“That’s why we see all these statements: he was the one who said the VAT cut would disproportionately benefit rich families, and now he’s saying a VAT cut on energy bills is the right thing to do.

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“He said tax cuts were a fairy tale, now he’s proposing an unfunded tax cut.

“There comes a time in election campaigns when people are under a lot of pressure – he clearly felt under a lot of pressure in the debate and wanted to come out on top and interrupt Liz.

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“I think that was the wrong look for him, I think that was the wrong action but I can understand why he did that.”

Asked on LBC radio whether Mr Sunak could win a general election, Mr Kwarteng replied: “He has flip-flopped and U-turned this tax issue, which I find somewhat worrying, but he is an able politician and a very likeable guy.”

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Criticism has also come from the opposition, with shadow Treasury Secretary Pat McFadden accusing Mr Sunak of “acting as his own personal refutation unit” and Liberal Democrat Treasury Department spokeswoman Sarah Olney saying “this sounds like another Sunak hoax”.

The pledge comes as an analysis by think tank Resolution Foundation pointed out that the kind of personal tax cuts promised by Ms Truss are “not a serious answer” to the cost-of-living crisis.

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The think tank said: “Rising energy bills will hit low- and middle-income households hardest this winter, but only 15% of the cost of scrapping the Social Security increase would go to the poorer half of the population, while 28% would go to the Top 20.”

Who supported Mr. Sunak?

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Transport Secretary Grant Shapps, a supporter of Mr Sunak, defended the £4.3billion policy as “reasonable” as it would not contribute to inflation.

He told Good Morning Britain: “In the short term it would be deflationary because people’s costs would come down, in the medium term it would have no impact on CPI.”

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When asked whether it was a “flip-flop”, Mr Shapps argued that Mr Sunak’s previous decisions had proved otherwise.

He said, “If [Mr Sunak] hadn’t produced £37bn in support, around £1,200 for the hardest hit households – if he hadn’t done any of that and then suddenly did it then you’d be right.

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“But he’s, he’s been giving all that support, now he’s saying, ‘Here’s something that doesn’t contribute to inflation and would save every person who sees your program £160 off their energy bills.’

“I think it’s worth it.”

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What is the VAT on energy bills?

VAT, which stands for “VAT”, is added to all gas and electricity bills by the government.

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VAT is currently 5% – and is the same for all providers.

There is a price cap on domestic energy bills, which is currently just under £2,000 per year.

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However, experts have forecast this could rise to £3,000 in the autumn.

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