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World fuel crisis Thursday, 21 September, 2000, 09:54 GMT 10:54 UK
UK fuel tax: The facts
Information graphic explaining UK fuel prices
The price of fuel in the UK is a complicated business and it changes month to month as the cost of crude oil rises and falls with international demand.

British drivers also pay two taxes on the petrol they buy at the pump: Fuel Duty and VAT. Of these, fuel duty remains by far the most significant - and remains the most controversial.

Fuel Duty

If a litre of unleaded petrol costs 85p, 21.7p will be the production costs and profit, around 51p will be duty and 12.5p will be VAT on top of all that.
Pie chart of British fuel prices

According to figures released with the 2000 Budget, the Government forecasts that fuel duties will continue to rise rapidly from a 21.6bn in the 1998-99 financial year to 23.3bn by the end of the 2000-01 financial year.

It's a lot of tax, but the Institute of Fiscal Studies, an independent think tank, says that the large rises in fuel duty began as far back as 1979.

Fuel Escalator

The major change in petrol taxation came under the Conservatives in 1993 with the introduction of the Fuel Price Escalator.

The escalator was designed as a means both to raise money and discourage car use on environmental grounds.

At the time, British fuel was the third-cheapest in Europe. It is now the most expensive.

The annual fuel escalator was set in 1993 at 3% above the rate of inflation.

On its introduction it added three pence to a litre of fuel and raised the tax burden on unleaded petrol to 72.8% of the total cost.

When the Conservatives left office in 1997, the escalator was at 5% and had contributed a 11.1 pence rise to the cost of unleaded fuel. Tax as a proportion of total cost stood at 76.3%.

Labour's record

On taking office, the new chancellor Gordon Brown increased the fuel escalator further and put three pence onto a litre of petrol in his first Budget. That pushed taxes up to 81.5% of the total price of fuel.

While duty rose by two pence a litre as part of the 2000 Budget, Gordon Brown also scrapped the fuel price escalator, saying that future increases would be decided on the basis of the "due Budget process".

At the time, and perhaps rather ironically given current events, the AA said that it was the first budget in seven years in which "drivers can take some heart".

According to the Tories this isn't good enough.

They say that since Labour came to office, the petrol pump price of unleaded petrol has risen by around 71%.

And while there have been large jumps in the price of oil, the party blames what it says is Labour's 16p per litre rise in taxes.

Figures from the Institute of Fiscal Studies tell a slightly different story. The Conservative figure of 16p per litre is a combination of duty and VAT.

While the actual amount brought in by VAT rises with increases in fuel prices and duty, it is calculated at the same 17.5% level which the present government inherited from the Conservatives.

VAT campaigning

Fuel campaigners argue that VAT should only be calculated on the cost of the fuel rather than on the fuel and the duty together.

If VAT was not charged on the duty, the motorist would save around 8p per litre at September 2000 prices. None of the parties appear to support that move.

Leaving aside VAT, fuel duty increases under Labour amount to 12 pence per litre - just slightly more than the rise caused by the escalator under the Conservatives.

Because of the rise in world oil prices, the proportion of the total fuel cost that is tax has fallen from 85% (March 1998) to 72.3% today - still one of the highest levels in the world - something that ministers have sought to stress in interviews.

With the Tories pledging a three pence a litre cut should they come to power, the question is whether the Government should cut fuel duty - and whether the country can afford it.


Click here to find out about the economic implications of a cut.


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14 Sep 00 | Business
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