Opinion: Time To Cut Fuel Tax
Government rakes in 70p from every litre of £1 fuel
Guest article by TaxPayers’ Alliance Policy Analyst Harry Fairhead
Everyone knows that fuel prices are on their way down.
This is certainly good news for beleaguered motorists who are sick of being taken for a ride.
However, the reason that fuel prices remain over £1 per litre is the atrociously large amount of tax still being levied.
Fuel Duty and VAT is taxed on a per litre basis, meaning that those on low incomes – already hard-pressed by other taxes – are feeling the pinch more than anybody.
It also, of course, means that as the oil price falls, the percentage of the pump price that goes direct to the Treasury’s coffers goes up .
George Osborne has made a song and dance about getting tough on the fuel companies, but perhaps he should use the power in his own hands.
The uncomfortable truth is that the tax component of the fuel price is still close to its historical high. The Office for Fair Trading says the fuel market is working well – if only this was true of government tax policy.
- Only once (in March 2011) has the rate been cut since the turn of the Millennium
- The graph below demonstrates how successive governments have not done enough to bring fuel prices under control by reducing the Fuel Duty rate
- Tax (Fuel Duty and VAT) represents 70 per cent of the price of a litre of petrol and 67 per cent of a litre of diesel
- This rises with every fall in the underlying petrol price – the fuel duty escalator is alive and well.
- Moreover VAT is charged on the total cost - including fuel duty. Another shameless example of double taxation!
The small fall in 2011 was welcome, but hardly made up for a decade of rises.
During the price war that OPEC is waging, Britons have seen the cost of their fuel fall to close to £1 per litre in some areas of the country.
But if George Osborne really wants to give hard-pressed motorists a break (already battered by road tax and parking charges) then cutting Fuel Duty is a painfully obvious place to start.
- The average price of petrol (ULSP) and diesel (ULSD) has fallen to lows of 108.87p and 116.2p respectively (12/01/15) from 130.83p and 135.50p in July 2014. This represents a fall of c.22p for petrol and c.19p for diesel
- The tax component of July petrol prices was 79.75p and 80.53p for petrol and diesel respectively. But in January 2015 this had only fallen to 76.09p and 77.32p respectively
- Falls of Just 3.66p and 3.21p in the tax revenue for each litre of petrol and diesel
- Over this same period the underlying price of petrol and diesel has fallen from 51.07p and 54.97p to 32.77p and 38.90p respectively: falls of 18.30p and 16.07p
- The underlying cost of both petrol and diesel has fallen five times faster than tax revenues has fallen
What does this mean? Well, despite oil falling below $50/barrel the Government’s tax policies mean that we (the motorist) don’t benefit from falling prices to the extent that we should. Essentially the model of Fuel Duty we currently have simply protects government tax revenues.
- The Government collected £26.9bn in Fuel Duties in 2013-14
Consider a few scenarios. The graph below shows six months of UK fuel prices, slightly lower the prices are shown as if Fuel Duties and VAT were levied at 2001 levels and at the bottom are indicative prices subject to US Fuel Duties.
- With 2001 rates petrol would currently average 92.35p/Litre and Diesel 99.55p/Litre
- With US rates, a mere 40.72 and 47.83p/Litre for petrol and diesel respectively
These indicate in starkest terms the real costs to UK taxpayers imposed by fuel duties.
- UK total tax per litre of petrol and diesel is 76.09p and 77.32p respectively
- The US taxes a mere 7.9p and 8.9p/litre (based on national average tax rates, and a six month average of the USD/GBP exchange rate)
- Petrol is taxed 68.19p/litre less and Diesel is 68.42p less in the US
This only serves to highlight that if there is a cost of living crisis, it is taxes that fuel it.
The power to reduce the price of a litre of petrol is in the Chancellor’s hands. He should use it.
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