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Should we lower VAT on petrol as it costs £100 to fill up a car?

Gasoline prices rise AGAIN to push the cost of filling up a family car to over £100. So is it time to cut VAT to help motorists? asks SIMON LAMBERT

Gasoline prices this week saw their biggest daily jump in 17 years, an event that was quickly followed by the cost of refueling an average car that broke the £100 mark.

Fuel prices are at record highs but the RAC has warned that “we’re still some way from peaking” – diesel and then petrol are expected to top £2 a liter in the summer.

Are we now in an exceptional situation that warrants a VAT cut to take some of the sting out of rising fuel prices?

How much? Rising petrol prices have taken the cost of filling an average 55 liter family car tank with unleaded petrol to just over £100

After Tuesday’s record rise, the RAC reported that fuel prices continued to rise, averaging 182.31p and diesel 188.05p yesterday.

At current tariffs, the cost of filling up a 55-litre petrol family car is estimated by the RAC at £100.27, while the same-size diesel tank costs £103.43.

The beginnings of the first Covid lockdown, when pump prices fell below £1, seem a long way off.

Of course back then people couldn’t take advantage of it and go anywhere due to the strict Covid rules and much of the world was closed hence the collapse in demand for oil and the nosedive in petrol and diesel prices.

It was an extraordinary circumstance and as often happens in the markets, prices oscillated too far in one direction: a barrel of Brent Crude fell towards $20 and the West Texas Intermediate metric briefly went negative.

We are still riding the devastating economic roller coaster of the Covid pandemic and this combined with Russia’s invasion of Ukraine and the energy crisis has pushed oil prices higher.

Brent crude is trading at around $120 a barrel and the falling pound against the dollar has exacerbated the impact for UK motorists on petrol and diesel prices.

But taxes also play a major role in fuel costs.

Figures from the RAC show that taxes account for 46 percent of a liter of unleaded petrol.

Before yesterday’s increase, a liter of E10 unleaded was 180.73p, of which 52.95p is fuel tax and 30.12p is VAT.

How much does a liter of petrol and diesel cost: Source: RAC and This is Money

How much does a liter of petrol and diesel cost: Source: RAC and This is Money

A quirk of our dual taxation regime for petrol and diesel is that VAT is levied on the fuel tax, so we pay tax on one tax.

The fuel tax was temporarily reduced by 5p in the budget, which briefly reduced prices, although often not as much as it should have been. But the rising oil price and the falling pound have meanwhile more than eaten up the savings of motorists.

There have been calls for a further reduction in fuel tax, but perhaps we should also target VAT.

Two points speak in favor of this: VAT receipts on fuel increase when petrol prices rise, and emergency VAT cuts are a tried and tested tool in the Chancellor’s arsenal.

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Should the VAT on petrol and diesel be temporarily reduced to counteract the skyrocketing prices?

A sales tax cut is relatively easy to implement and reverse, and a significant cut could make a big difference to what is a significant expense for most people.

Living outside of London or a handful of major cities, they often rely on their car to get to work, take their kids to school, or just get around.

There’s an environmental argument against lowering taxes on gas: Cheaper motoring encourages people to use their cars more than less polluting modes of transportation such as public transport, walking or cycling.

However, we are now at the point where pump prices are so high that we could afford to take a good chunk off and still end up with the same environmental price balance that we had not too long ago.

The summer of pain promised by striking rail unions is likely to do far more harm to the attractiveness of using public transport than a temporary cost of living reduction in the VAT cut on gasoline.

The risk remains that a VAT cut on petrol will be attacked by opponents as regressive, as the poorest in society are likely to have the fewest cars, but car ownership and dependency is so widespread that I’m not sure however, this argument is valid.

Boris Johnson is said to be desperate for ideas to help with the cost of living during the crisis. I’m not convinced Rishi Sunak would go for it, but easing double taxation on filling up a car before the price of petrol reaches £2 a liter could go down well.

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Should we lower VAT on petrol as it costs £100 to fill up a car?

Source link Should we lower VAT on petrol as it costs £100 to fill up a car?

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