Labour plans VAT cut and new windfall tax on oil and gas producers to fund £600 energy bill cut

Labour piled pressure on Boris Johnson to act over energy bills today  after claiming it would cut bills by up to £600 for the worst off if it was in power.

Shadow chancellor Rachel Reeves said the party would scrap VAT for a year and impose a windfall tax on north sea producers to tackle the emerging cost of living crisis.  

The £6.6 billion plan would include removing VAT on domestic energy bills for a whole year, as well as expanding and increasing the warm homes discount for those most at risk.

Boris Johnson previously used cutting VAT as a reason to leave the EU, but has since opposed it as a ‘blunt instrument’ that does not help those most in need. 

The tax would reduce average bills by £200, with targeted support for low earners, pensioners and the ‘squeezed middle’ adding £400. 

The producers would be forced to contribute £1.2 billion to help fund the proposals, through a year-long increase to their corporation tax of 10 percentage points.

Shadow chancellor Rachel Reeves blamed ministers for creating a ‘price crisis’ by responding to surging wholesale energy costs with ‘dither and delay’ as she detailed the plan.

She told Sky’s Trevor Phillips on Sunday: ‘The Prime Minister was the biggest advocate for cutting VAT on gas and electricity bills during the European referendum. But now when cutting those bills would make more difference than ever, the Prime Minister says no.

‘Well, I say that bills can’t be paid on broken promises. The Government should honour that commitment that the Prime Minister made to take VAT off gas and electricity prices.

‘If this isn’t the time to do it, then frankly I don’t know when is.’ 

And she warned that Russian leader Vladimir Putin increasingly had the UK ‘over a barrel’ due to his control over gas supplies to western Europe. 

The Government is under increasing pressure to act, with experts predicting a 50 per cent hike to bills in April, meaning an average household paying about £700 more per year.

Labour says its plan would save most households about £200, while targeted support to low earners, pensioners and the squeezed middle would save them £600.

It would spend an extra £3.5 billion on the warm homes discount, to increase it from £140 to £400 per year, while pledging to double the number of households eligible to 9.3 million.

VAT would also be removed from household energy bills for a year from April, six months longer than Labour has previously called for, at a cost of about £2.5 billion.

Smoothing the costs of supplier failure by removing them from customers’ bills would cost £2.6 billion, while a £600 million contingency fund would be established to support energy intensive firms.

As well as the corporation tax rise for North Sea oil and gas producers in 2022/23, Labour said the money would come from a forecast £3.1 billion extra in VAT receipts as a result of rising prices.

The final £2.3 billion required would come from additional North Sea oil and gas receipts forecast, according to the figures used by the party.

Ms Reeves said: ‘There is a global gas price crisis, but 10 years of the Conservatives’ failed energy policy, and dither and delay, has created a price crisis that’s being felt by everyone.’

As well as the temporary measures, she said Labour would work to prevent price hikes by accelerating home-grown renewables and new nuclear.

She also said the party would retrofit 19 million homes to reduce bills and ‘reform our broken energy system to stop energy companies playing fast and loose with the rules’.

Separately, Conservative former energy minister Chris Skidmore backed the idea of a windfall tax as Prime Minister Boris Johnson also comes under pressure from his own MPs to reduce bills.

The MP for Kingswood told Channel 4 News: ‘A windfall tax – whether you call it that, or you want to call it a carbon tax, I would rather talk about – is how we achieve carbon tax for the future, is absolutely I think the right way to go.’

Experts have warned that the squeeze could be even worse than the credit crunch 14 years ago, thanks to a toxic combination of spiking prices, the looming national insurance hike, and over a million people being dragged into the higher rate of tax. 

Experts believe soaring wholesale costs will mean a 50 per cent rise in April when the change to the energy price cap, determined next month, comes into effect.

That would cause an average household on a supplier’s default tariff to pay nearly £2,000 per year for their gas and electricity, compared with less than £1,300 today.

Responding to Labour’s proposals, a Government spokesman said: ‘The energy price cap is currently insulating millions of consumers from high global gas prices. We’ll continue to listen to consumers and businesses on how to manage the costs of energy.

‘We recognise people are facing pressures with the cost of living, which is why we are taking action worth more than £4.2 billion, and supporting vulnerable households through initiatives such as the £500 million household support fund, warm home discount, winter fuel payments and cold weather payments.’