The Chancellor of the Exchequer, Rishi Sunak, has been told last week’s fuel tax cut is merely “a drop in the ocean”. Sunak has received a mixed response to his fuel duty cut, which was announced in the spring statement last week as a measure to reduce the cost of petrol and diesel for consumers.
Fuel duty was reduced from 57.95p per litre on both petrol and diesel to 52.95p per litre on March 23, in an attempt to help motorists after the war in Ukraine caused prices to rise. The cut, which will remain in place for a year, should amount to more than 5p per litre, though, because VAT is levied on the entire cost of fuel, including fuel duty, adding 20 percent to the price.
The Treasury said the change “represents a tax cut of around £2.4 billion” over the coming 12 months, and would amount to a saving of “more than £5 billion” when compared with the original plan to up fuel duty for the 2022-23 financial year. The Treasury expects the tax cut to save the average UK motorist around £100 over the course of the year.
However, the RAC has told the Chancellor the cut to fuel duty doesn’t go far enough, with the organisation’s head of policy, Nicholas Lyes, saying it would only reduce prices to the levels seen in mid-March. Instead, Lyes suggested reducing VAT on petrol and diesel would have been a “more progressive way of helping drivers”.
“With petrol and diesel prices breaking records almost daily, and the cost to fill up a petrol car at over £92 and a diesel at nearly £100, we’re pleased to see the Chancellor has given drivers some much-needed relief at the pumps,” he said. “But the reality is that a 5p cut in duty is something of a drop in the ocean.
“Reducing [fuel duty] by 5p will only take prices back to where they were, and drivers will only notice the difference at the pumps once retailers have bought new fuel in at the lower rate. There’s also a very real risk retailers could just absorb some or all of the duty cut themselves by not lowering their prices. If this proves to be the case it will be dire for drivers. It wouldn’t be totally unexpected, based on the biggest retailers not reducing their prices late last year when the oil price fell sharply.
“Temporarily reducing VAT would have been a more progressive way of helping drivers as the tax is applied at the point the fuel is sold. It’s also the case that the Treasury is benefitting hugely from the high fuel prices because of greater VAT revenue. The Chancellor is currently getting 28p a litre VAT on petrol and 30p on diesel – this of course comes on top of fuel duty as VAT is a tax on a tax.”