VAT energy bills: Rishi Sunak pledges to scrap VAT on energy bills - U-turn, criticism and tax explained

Rishi Sunak has pledged to scrap VAT on all domestic energy bills for the next year if he becomes Prime Minister in a surprising U-turn.

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

But critics have accused Mr Sunak of “flip-flopping”, pointing to his frequent condemnation of his opponent Liz Truss’ promises of unfunded tax cuts - which he previously described as “comforting fairy tales”.

Meanwhile, the former chancellor’s campaign team have said his promise in fact “stands in contrast to the inflationary £55 billion of fiscal commitments Ms Truss has made.”

So, what has Mr Sunak promised, what has the response been, and how much VAT is on energy bills as it stands?

Here’s what you need to know.

What has Rishi Sunak pledged on energy bills?

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, as is forecast by experts.

The Richmond MP said: “Tackling inflation and getting people the support they need to help with the cost of living is critical.

“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.”

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

He added: “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.”

Mr Sunak previously rejected calls from Labour for a cut to VAT on energy bills, saying “the policy would disproportionately benefit wealthier households” and that “there would be no guarantee that suppliers would pass on the discounts to all customers”.

In addition to scrapping VAT on all domestic energy bills, the Tory leadership hopeful also said he would undertake major supply side reforms aimed at bringing down costs.

What has the criticism been?

Critics have suggested Mr Sunak’s pledge comes only because of Ms Truss’ promises of tax cuts - which some believe to be the reason she is ahead in the polls.

A YouGov poll, taken after the pair repeatedly clashed over tax in the BBC’s leadership debate on Monday (25 July), found that 50% of Tory members thought Ms Truss performed better - compared with 39% for Mr Sunak.

On dealing with the cost of living, 55% thought the Foreign Secretary was better, against 34% for the former chancellor.

Business Secretary Kwasi Kwarteng, a senior ally of Ms Truss, claimed Mr Sunak’s U-turn shows he is under pressure in the race to become Prime Minister.

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

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

“He was saying that tax cuts were a fairytale, now he is proposing an unfunded tax cut.

“There comes a time in campaigns when people are under a lot of pressure - he clearly felt under a lot of pressure in the debate and he wanted to get out on the front foot and interrupt Liz.

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

When asked on LBC radio whether Mr Sunak could win a general election, Mr Kwarteng replied: “He has flip-flopped and U-turned on this tax issue, which I find somewhat concerning, but he is a capable politician and a very likeable chap.”

Criticism also came from the opposition, with Shadow Treasury Minister Pat McFadden accusing Mr Sunak of “acting as his own personal rebuttal unit” and Liberal Democrat Treasury spokesperson Sarah Olney saying “this sounds like another Sunak Swindle”.

The pledge comes as analysis by thinktank the Resolution Foundation suggested these types of personal tax cuts, such as those being promised by Ms Truss, are “not a serious answer,” to the cost of living crisis.

The thinktank said: “Rising energy bills will bite hardest for low-income and middle-income households this winter, but only 15% of the cost of scrapping the national insurance rise would go to the poorer half of the population, while 28% would go to the top 20th.”

Who has supported Mr Sunak?

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

He told Good Morning Britain: “In the short term it would be deflationary because people’s costs would reduce, in the medium term it would not have an impact on the consumer prices index.”

When asked if it was a “flip-flop”, Mr Shapps argued Mr Sunak’s past decisions proved the opposite.

He said: “If [Mr Sunak] hadn’t produced £37 billion of support, about £1,200 to the hardest-up households already – if he hadn’t done any of that and then suddenly did it, then you would have a point.

“But he has, he has been providing all this support, now he is saying: ‘Here’s something that won’t add to inflation that would save every person watching your programme £160 off their energy bills’.

“I think that’s worthwhile.”

What is the VAT on energy bills?

VAT, which stands for ‘value-added tax’, is added by the government to all gas and electricity bills.

As it stands, the VAT is set at 5% - and is the same across all suppliers.

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

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