Labour will on Tuesday pile pressure on Boris Johnson to scrap value added tax on household energy bills, by forcing a parliamentary vote on the issue that will expose Tory divisions on how to address the cost-of-living crisis.
The UK prime minister and Rishi Sunak, chancellor of the exchequer, on Sunday held talks to discuss measures to mitigate pressures on household budgets, after Johnson last week described the VAT move as a “blunt instrument”.
Sunak’s officials are considering a one-off windfall tax on North Sea oil and gas production companies, which are enjoying a boom because of surging gas prices, to raise about £1bn to help offset rising household energy bills.
The Treasury is sceptical about such a tax, fearing that it could freeze investment, cut supply and drive up oil and gas prices. But one ally of Sunak said: “We are not ruling out anything at this stage.”
Johnson and Sunak are coming under pressure to help families through the cost-of-living crunch from Conservative MPs and normally supportive newspapers including the Daily Mail, Daily Express and The Sun.
Labour will exploit these tensions on Tuesday by forcing a House of Commons vote that would allow the opposition party to bring forward legislation to cut VAT on household energy bills from 5 per cent to zero for one year.
Boris Johnson advocated the policy at the time of the Brexit referendum in 2016, and in recent days a number of Conservative MPs have endorsed a move to zero VAT on domestic energy.
Ed Miliband, shadow climate change secretary, said: “The government — and all the Tory MPs who have previously backed a VAT cut on home energy bills — should follow through with their promises and vote with Labour to scrap the tax for a year.”
The Labour procedural motion, if approved, would allow the party to bring forward a bill to cut VAT on domestic energy bills on February 1, a possibility that Johnson will want to close down.
Johnson and Sunak have agreed that the cost-of-living crisis is so broad that the government should not rush to announce measures to mitigate it. “We’ve got to get this right,” one government insider said.
The crisis could peak in April when millions of families face a rise in the annual energy price cap — currently £1,277 but forecast to increase to about £2,000 — that will coincide with tax changes that could cost the typical household £600 a year.
But, in the meantime, Number 10 will be buffeted by demands from MPs and the media to set out a plan.
Sunak has not excluded a VAT cut on domestic energy bills, at a cost of about £2bn, but he and Johnson have concerns that it would benefit all households and not just those in the most need.
Expanding the warm homes discount scheme, currently worth £140 each winter to 2.7m poorer households, would be a more targeted approach. A taxpayer-funded payment of £300 to 8.5m households would cost up to £2.5bn.
Labour and the Liberal Democrats want a one-off windfall tax on North Sea oil and gas production companies to help defray the extra household costs. Bernard Looney, BP chief executive, said in November that high energy prices had turned his company into a “cash machine”.
Kwasi Kwarteng, business secretary, signalled in September that he was considering “all options” after the Spanish government introduced its own windfall tax on the energy sector.
But the Spanish experience has given UK ministers pause for thought, according to officials. Madrid watered down its energy tax after power companies said it was hitting their investment in low-carbon energy schemes.
The idea of a UK windfall tax on North Sea producers is not new. Experts pointed out that successive governments have in the past regularly tweaked the tax regime covering North Sea production to reap higher receipts during periods of strong oil or gas prices.
Meanwhile, Downing Street urged “restraint” from MPs amid expectations that an independent review body will recommend a pay rise of about £2,000 to their £81,932 annual remuneration in April, as the cost-of-living crisis hits. Keir Starmer, Labour leader, said MPs should not take the rise, expected to be about 2.7 per cent.