VAT on household energy bills will not be cut in the Chancellor’s Budget on Wednesday, despite calls to help families struggling with soaring prices.
Labour has been calling for the rate to be slashed from 5% to zero for the next six months to help households get through a “tough winter”.
But Whitehall sources have told the BBC such a move would be poorly targeted.
They say lower income households can be better helped through other schemes.
Rising energy bills have been causing alarm to families and political leaders amid warnings from the energy regulator, Ofgem, of more “significant rises” next spring.
The cap on prices, which went up earlier this month for households in England, Scotland and Wales, is due to be reviewed again next April, with the expectation that it will climb further.
When the price cap was increased on 1 October, about 15 million households faced a 12% rise in energy bills.
Those on standard tariffs, with typical household levels of energy use, saw an increase of £139 – from £1,138 to £1,277 a year.
Prepayment meter customers with average energy use saw a £153 increase.
Even if wholesale gas prices were to drop significantly from now, the extra costs that suppliers have had to shoulder in the last couple of months means a steep rise in household bills in April is inevitable.
Shadow chancellor Rachel Reeves, who was speaking on the BBC’s Andrew Marr Show last Sunday, said many households were facing a “tough winter”, and were worried about putting food on the table and heating their homes because prices were going up “on everything”.
She said: “When we pay our gas and electricity bills, 5% of that money goes automatically to the taxman.
“There’s something very simple the government could do. It would be immediate and it would be felt automatically on people’s bills next month – and that is to cut that rate of VAT from 5% to 0%.”
She said she had been looking at VAT receipts and they had come in more than £2bn higher than forecast because of rising prices, giving the chancellor some wriggle room to act.
But Chancellor Rishi Sunak, who was on the same programme, said there was “no magic wand” to make the problems disappear.
He said there were several factors contributing to high inflation, such as pressure on global supply chains as economies have reopened after Covid, and soaring energy prices.