The move would help struggling families to cope with soaring energy bills this winter, although a cut would cost about £1.5bn a year.
Cutting taxes on energy ahead of the COP26 climate change conference in Glasgow at the end of this month could also prove to be controversial, as it would effectively mean subsidising fossil fuels ahead of the summit.
What has been said?
Reports have suggested that Mr Sunak is considering cutting the VAT on domestic energy bills from 5% to zero as early as 1 November.
Robert Halfon, Conservative chair of the House of Commons education committee, previously told the Financial Times (FT) that cutting VAT would “show we are doing something to help consumers”, adding that it would also honour a Brexit pledge as EU rules had not allowed VAT on energy bills to be lower than 5%.
The FT also said the move was supported by Conservative grandee Sir Christopher Chope, but the newspaper reported that no decisions have yet been taken.
One Treasury official told the FT: “It would tick two boxes - it reminds people of the benefits of Brexit and shows you’re listening to people.”
Labour has urged the government to scrap VAT from household energy bills immediately, saying that the cost of living crisis is impacting working people across the UK.
The party said the cut should be in place for six months and be automatically deducted from bills to cover high energy costs that are expected this winter.
It said the cut could be funded by higher than expected VAT receipts accrued since the start of the year.
Analysis from the party found the poorest 10% of households pay on average £756 a year per person for electricity, gas and other fuels. Labour said this was an extra 50% above what the richest households pay, at £504 per person on average, and more than the national average at £530.
Shadow chancellor Rachel Reeves said: “We want our everyday economy to thrive, and for people to be secure and prosperous.
“But right now, people are being hit by a cost of living crisis which has seen energy bills soar, food costs increase and the weekly budget stretched.
“That’s why Labour is calling on government to immediately remove VAT on domestic energy bills for six months.
“We need a sustainable and ambitious approach to energy, which is why Labour would also ramp up ambition with our plan to retrofit 19 million homes and make our energy supply chain more secure.
“Conservative complacency is making the cost of living crisis worse and storing up long-term problems, with working people paying the price.
“With the Budget approaching, the Chancellor has choices to make. He can choose to let online giants dodge tax, and ignore the cost of living crisis – or he can give working people a helping hand by providing an immediate cut to their energy bills.”
When is the Budget announcement?
Mr Sunak will set out the government’s tax and spending plans in the Budget announcement on Wednesday (27 October).
It will be the second Budget in the year, following the one in March, and will coincide with the conclusions of the 2021 Spending Review, which will set out how the government will fund public services for the next three years.
The Chancellor has confirmed that the 12-month public sector pay freeze will come to an end, meaning more than five million workers will potentially receive a pay rise next year, including teachers, police and social care staff.
The end to the freeze comes after Mr Sunak said the UK economy is “firmly back on track” now that lockdown restrictions have been lifted.
National Living Wage has also been confirmed to increase from £8.91 per hour to £9.50, meaning around two million workers will see their pay go up next year.
The Treasury confirmed on Monday (25 October) that the increase for all over-23s will take place on 1 April.
The 59p hourly boost will mean a full-time worker on the living wage will get a pay rise of more than £1,000 per year, according to the government.
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