To make the chilli sugar, process chilli until fine; add sugar, process until combined. Transfer to a plate.

To make the caramel sauce. Stir sugar and the water in a small saucepan over low heat, without boiling, until sugar dissolves. Bring to the boil; boil without stirring, until golden. Taking care as the mixture will splutter, add cream; stir over low heat until smooth. Remove from heat; cool.

Bring butter and the water to the boil in a medium saucepan over medium heat. Add flour and salt; beat with a wooden spoon over high heat until mixture comes away from base and side of pan and forms a smooth ball.

Transfer mixture to a small bowl of an electric mixer; beat in eggs, one at a time, with vanilla seeds and cinnamon until mixture is glossy. Spoon pastry mixture into a piping bag fitted with a 2cm (¾-inch) fluted tube.

Fill a large saucepan or deep fryer one-third full with oil; heat to 180°C/350°F (or until a cube of bread turns golden in 10 seconds). Pipe dough, in 10cm (4-inch) lengths, in batches, into oil (cut off lengths with a knife). Deep-fry churros for 4 minutes, turning halfway through, or until browned and cooked through. Drain on paper towel; immediately toss in chilli sugar. Transfer to a tray, cover to keep warm. Repeat with remaining dough and chilli sugar.

Serve churros with caramel sauce.