Throughout June there was endless speculation in the media over whether the government would stick with its planned fuel duty increase on August 1. At the same time, with crude oil prices having fallen from a peak of around $130 a barrel earlier in the year to around $90, pump prices had fallen steadily to a point where ’mainstream’ retail sites in some areas had started selling unleaded petrol at below 130ppl. It seemed pretty obvious that the lower commodity price gave the perfect cover for a tax rise. And, since the Chancellor had already performed so many U-turns reversing Budget announcements that he must be feeling dizzy, surely this was one tax increase that would go ahead, regardless of unpopularity?
Well, as we now know, Lonesome George bowed to common sense and postponed the increase until December 31, and everyone in this business breathed a sigh of relief. But not before some people who should have known better had managed to make themselves look rather silly. While it was perhaps understandable that the popular papers showed some confusion about how petrol pricing works, it was more surprising, indeed alarming, to find senior politicians and even AA spokespeople seemingly also showing their ignorance. In particular, hearing the Shadow Chancellor on the radio implying that the fuel industry, including retailers, should do more to absorb any duty increase, and the AA wittering on about ’fuel price transparency’ and appearing to blame the fuel retail industry for high prices.
Last September, we gave a very simplified example of how to translate the commodity price of fuel (Platt’s Price) into a pump price. This time, let’s just stick to something simple, like the distinction between the two different taxes that the government imposes on fuel.
This is a flat-rate tax in other words it’s fixed from time to time and bears no direct relationship to the cost of the product.
Since March 23, 2011, the duty on petrol, diesel, biodiesel and bioethanol has been 57.95ppl. Just for comparison, the duty on fuel oil the stuff burned in central heating systems and AGA cookers is 10.7ppl; the duty on ’off-road fuels’ is 11.14ppl; and for road-use LPG it’s 31.6p per kilogram.
Each of these rates is currently planned to increase by 3.02p from August 1.
Value added tax, as its name implies, varies in proportion to the cost of the product. That means after any relevant duty has been applied, with VAT at the standard rate of 20%, one sixth of the final retail price goes to the government. Given our pump price at 129.9p, one sixth (21.65p) is VAT.
So how then does our current pump price break down?
l Pump price (ppl)129.90
l VAT 21.65
l Retailer margin (say)3.00
l Cost of fuel, distribution 47.30
We see that the Treasury’s total ’take’ out of this litre works out as (21.65+57.95) = 79.6p. Put another way, that means over 61% of the retail price goes in taxes of one sort or another.
If the duty increases as planned at the end of this year, and assuming that everything else (cost of fuel, retailer margin, etc) stays the same, the result will be:
l Pump Price133.52
l Retailer margin3.00
l Cost of fuel, distribution 47.30
l VAT @ 20%22.25
l Total cost before VAT111.27
We see that our pump price immediately rises by 3.62ppl, and the Treasury’s ’take’ goes up to (22.25+60.97) = 83.22p. That would be 62.33% of the retail price without any other changes. Except that inevitably the retail side of the industry would round up the increase from 3.62p to something more like 4p at the same time. Nobody within the industry would begrudge the hard-pressed dealer from adding a fraction of a penny to their own margin, but even that would barely cover the additional costs (stock holding, bank charges and credit card fees) resulting from the underlying increase. Let’s not forget that adding 3.02ppl to a typical tanker delivery of (say) 28,000 litres will push up the price of that delivery by £845.60 before VAT, or £1,014.72 with VAT.
It has been estimated that the Treasury’s total revenue from fuel duty is around £27bn per year, added to which the VAT from fuel sales produces around £5bn.
The funny thing is that it’s not always been this way. Fuel duty was introduced in 1909 (at three old pence a gallon or about 0.28ppl in today’s coinage) but was abolished 10 years later after huge increases in the raw cost of fuel during WW1. The vehicle tax disc, or what was then called Road Fund Licence and is now known as Vehicle Excise Duty, replaced the revenue from fuel duty. However, governments being what they are, they reintroduced fuel duty in 1928 alongside the tax disc. That in itself should serve as a salutary warning to all those who campaign for road pricing or any other single form of transport taxation. You can’t trust governments to abolish one tax on the premise that it’ll be replaced by a different scheme, when they can just as easily have the revenue from two forms of taxation.
As for the Shadow Chancellor, clearly Mr Balls was trying to avoid coming down against the duty increase. After all, his own party had used the same tool while in power, and no doubt would do so again if given the keys to Numbers 10 and 11. Much easier to suggest that the retail side of the industry somehow absorbs the cost and gives away more margin than many of them actually make. Perhaps, before his next pronouncement on the subject, he should ask his aides to arrange a quiet visit to a small independent fuel retailer and let them show him how things really work in this industry.