VAT on petrol

Up 5p a litre in one year

15 March 2011

Soaring pump prices and the 2.5% increase in VAT on January 4 have added almost 5p/litre in a year to the Government's tax-take from VAT on petrol, says the AA.

VAT from diesel sales has risen nearly 6p/litre.

A litre of petrol costing on average 132.61p/litre, generates 22.10p in VAT.

A year ago petrol cost 115.25p and with 17.5% VAT produced 17.16p/litre tax for the Government.

Even if VAT had stayed at 17.5%, the tax-take over the year would have been 2.76p/litre higher for petrol and up 2.89 for diesel, courtesy of soaring prices.

The Government is enjoying an extra 2.18p a litre from petrol and 2.92p from diesel, following the VAT increase at the start of the year.

The AA argues that stock market and Middle East-boosted oil prices are already bringing in substantial additional income for the Government – £1.34 million extra a day from petrol sales alone.

With rising pump prices bringing in even more additional VAT income, the Government would still enjoy the significant boost to national finances without pushing ahead with the fuel duty increase on 1 April.

"With many drivers already forced to cut back on car use and petrol sales down by at least 3.4%, the fuel duty increase will not only push more drivers into road fuel poverty but undermine fuel duty revenue", says Edmund King, the AA's president.

Higher prices weaken demand

The last government predicted a £0.2 billion fall in fuel duty receipts from higher pump prices 2009-10, but still went ahead with a fuel duty escalator.

They expected that receipts from 2010 onwards would fall another £0.7 billion a year if oil prices rose $20 or more a barrel.

Drivers hope that the coalition government will recognise in next week's budget that a further fuel duty increase on top of soaring pump prices will weaken demand and hit the economy.