Rishi Sunak's team has warned that cutting VAT by 5% across the board would be "regressive" and cost tens of billions of pounds amid reports that Liz Truss is considering the move as a "nuclear" option.
It is one of a series of possible strategies to ease the cost-of-living crisis being drawn up by the Treasury for the new prime minister to look at when they take office, according to The Sunday Telegraph.
The newspaper said the 20% headline rate of VAT could be cut by up to 5%, saving the average household more than £1,300 per year.
However, a source from Mr Sunak's campaign said this would be "incredibly regressive" and cost north of £30 billion.
The Sunday Times also reported that Ms Truss is considering slashing VAT as part of an emergency package to help households cope with rising prices.
Another option being weighed up by the Foreign Secretary is a cut to income tax, the paper said, with proposals from allies including increasing the level above which people start paying the levy.
Others in the Truss camp have suggested raising the tipping point for the higher rate of 40% and cutting the basic rate below 20%, it added.
A Treasury spokesman said the department is making the "necessary preparations" to ensure the next government has options to deliver extra help "as quickly as possible".
Meanwhile, Scottish political parties have criticised both the Scottish and UK Governments for a lack of action over the cost of living crisis.
As the Tory leadership race continues, the UK has a “zombie government” as people across the country struggle more and more with the ongoing cost-of-living crisis, the Scottish Labour leader said.
Anas Sarwar said he has struggled to contain his anger over the last week following the price cap hike as he added “Where the hell is our government?”
With the energy price cap due to rise to more than £3,500 in October, Mr Sarwar, said the governments at both Westminster and Holyrood had a “moral duty to act”.
The Scottish Labour leader said the Scottish Government has powers and responsibilities to improve the energy situation for many households across the country as he urged the government to implement Labour’s Cost of Living Act. The act proposes bringing down the cost of commuting by having rail and bus fares capped, introducing a winter eviction ban and freezing rent prices as well as writing off school meal debt.
The Scottish Liberal Democrats have said the energy price cap must be scrapped as Britain is on the brink of the worst cost of living crisis in a century, leaving millions facing financial devastation.
Nearly a quarter of the UK public are planning to ditch heating their houses this winter as a result of the significant hike to energy bills, according to new Savanta ComRes polling commissioned by the Lib Dems. A total of 2,120 UK adults aged 18+ were interviewed online between July 29 and 30 022 and were asked if they would switch off their heating to cope with the price hike.
Almost one in four (23 per cent) of UK adults plan to never turn their heating on this winter. This rises to over one in four (27 per cent) amongst parents with children under the age of 18.
The party is calling for scrapping of the energy price cap rise in October, as well as further targeted support provision at the lowest paid.
The party’s plan to keep energy bills at their current price would be part funded by a further Windfall Tax on oil and gas companies – also called on by Scottish Labour.
The Scottish Greens have called for the UK Government to reverse the price cap to October 2021 levels, bring back and double the £20 Universal Credit and consider raising minimum wage and nationalise energy companies to protect communities in the Highlands and Islands from a “winter wipe out of fuel, food and families”.
Bruce Adamson, the Children and Young People’s Commissioner for Scotland, also insisted “urgent action” was needed from all levels of government.
Mr Adamson has already warned energy regulators at Ofgem that the rise in the cap will see more families “pushed into poverty and destitution with devastating consequences”.
The £400 rebate on energy bills already promised by the UK Government was “nowhere near enough”, the children’s commissioner said.
Instead, Mr Adamson said: “We need urgent action from the UK Government, the Scottish Government, from local authorities, everyone who is in a position of power needs to act immediately, because this isn’t affecting just a small number of children and families, this is affecting every single child in Scotland.”
Tracy Black, CBI Scotland director, said both governments need to step in to prevent business from closing and to encourage economic growth.
Ms Black said: “Raw materials have become more expensive, freight costs are more expensive so there’s real pressure on businesses and it’s not set to get better over the coming months.
CBI Scotland has asked the government to commit to business rate freezes and flexibility in paying loans with a pandemic loan scheme expanded.
The body has also asked for the industrial energy transformation fund to be expanded to help businesses use less energy and help households with bills.
The Scottish Government has said they are treating the energy crisis as a “public emergency” and households “simply cannot” be expected to carry the burden of further price rises in October.
They have called also called on the UK Government to commit to freezing the cap for all households and to supporting energy companies to deliver that.
The Scottish Government said it has allocated almost £3 billion this financial year to help households face the increased cost of living.
This includes the provision of services and financial support not available elsewhere in the UK such as the Scottish Child Payment and the £10 million for the Fuel Insecurity Fund.
Boris Johnson said whoever succeeds him in No 10 would announce "another huge package of financial support".
The outgoing PM hinted at the scale of the options to ease the burden being teed up for either Ms Truss or Mr Sunak to consider, as he insisted "we must and we will help people through the crisis".