What are fuel duties?
Most oils, including road fuels, are subject to excise duties. The system of duties is administered by HM Customs and Excise, and revenues are collected from manufacturers and importers of liable oil products. This means that none of the price paid by the motorist at the petrol pump goes directly to the state. Rather, it reflects the price charged by the manufacturer or importer to the distributor or retailer, which is passed on in turn to the consumer.
Different types of oil products are subject to different rates of duty, with road fuels generally being taxed much more heavily than other oils. The majority of oils are liable on a per litre basis.
The rates of road fuel duties are adjusted annually by the Chancellor of the Exchequer as part of the Budget, with changes coming into force that day under the terms of the Provisional Collection of Taxes Act 1968.
It is a legal requirement to run road vehicles on duty-paid fuels. Failure to do so can result in a fine of up to £250 plus the evaded duty, along with the risk of forfeiture of the vehicle. Registered non-DVLA registered vehicles, which includes tractors and some other agricultural vehicles, are permitted to use rebated heavy fuel oils or gas oil, the latter known as "red diesel" because of the dye that is added to it in order to prevent it from being used in ineligible vehicles.
Petrol duty was first introduced in 1909, at a rate of 3d per gallon under the Finance Act 1908. By 1915, this had doubled to 6d, albeit with a 50 per cent rebate for commercial vehicles. However, it was abolished under the Finance Act 1919, which also introduced the tax disc and the taxation of vehicles according to their horsepower rating (the "Treasury Rating").
The price of fuel dropped dramatically in the following years, and the Government felt confident enough to reintroduce petrol duty at a rate of 4d per gallon in 1928.
The current state of affairs with regard to road fuel duties has its origins in Norman Lamont's Budget of 1993. In this, the then Chancellor increased duties by 10 per cent and announced the "fuel duty escalator", under which they would increase annually by 3 per cent above inflation. The oil industry tolerated this, because at the same time the Chancellor reduced Petroleum Revenue Tax from 75 per cent to 50 per cent, and abolished it altogether for new fields developed after 1993. Indeed, the immediate effect of the Budget was a 6.4 per cent surge in BP's share price. In 1990, a litre of petrol had cost 41p - by 1995, this had risen to 59p.
In November that year, the new Chancellor Kenneth Clarke announced that the escalator would be 5 per cent above inflation per year. This situation persisted until July 1997, when the new Labour Chancellor Gordon Brown increased the escalator rate to 6 per cent above inflation. By 2000, the average price of petrol was 82p per litre.
Public discontent at the price of fuel had been growing for months, particularly amongst farmers and road hauliers. Following protests in France, in September, discontent broke out into a series of go-slow protests through towns and on major roads, and blockades of oil refineries. The protests, led by the group Farmers For Action, won considerable public support, and brought some parts of the country to a virtual standstill within days. The Government, however, refused to give in to the demands to reduce fuel duties.
However, the Pre Budget Report of November that year promised reductions in duty for ultra-low sulphur petrol and conventional unleaded petrol of 2p per litre, and a freeze on duty until 2002. This, along with a series of reforms to Vehicle Excise Duty, was implemented in the 2001 Budget.
Threats of new protests arose intermittently throughout the following years, but nothing of the scale of September 2000 coalesced. By October 2003, the Government was willing to begin increasing fuel duties in line with inflation once again - although increases announced in the 2004 Budget were deferred from their intended September 1 start date until later in the year.
In his first Budget as Chancellor in 2008, Alistair Darling announced that a 2 pence per litre increase expected to be introduced on 1 October 2008 would be postponed, leaving fuel duty rates at 50.35 pence per litre. Planned increases in road fuel gases, biofuel duty rates and rebated oils rates were also postponed. The Chancellor said the global credit crunch had pushed prices up at the pumps and the postponement would help motorists and businesses "get through what is a difficult time for everyone".
The 2 pence per litre increase was introduced on 1 September 2009 with plans for a one pence per litre increase in real terms each year from 2010 to 2013, which the Chancellor claimed would save two million tonnes of CO2 per year by 2013-14. In Labour's final budget it was announced that rises in fuel duty for 2010 would be staged, with a one penny per litre increase on 1 April and 1 October and there would be a subsequent increase of 0.76 per litre on 1 January 2011.
These planned increases were continued by the Coalition government in its first (emergency) Budget of June 2010.
In the following year's Budget, fuel duty was cut by 1p per litre effective from 23 March 2011. Also, the inflation rise in duty planned for April 2011 was postponed until January 2012, and the April 2012 inflation rise put back to August 2012.
In addition, Chancellor George Osborne announced that the fuel duty escalator introduced by the previous Labour Cabinet, which would have added an extra penny to fuel on top of inflation, would be cancelled for the duration of this Parliament.
Instead, a 'Fair Fuel Stabiliser' was introduced and in the March 2012 Budget, the Chancellor confirmed that above inflation rises would return only if the oil price fell below £45 on a sustained basis.
The price of road fuel is one of the most divisive political issues in the country, with campaigners demanding both higher and lower duties.
Environmental groups insist that the levels of duty charged by the Government fall short of meeting the true environmental costs of motoring. They point to the rising numbers of short private car journeys and call for higher duties in order to discourage "unnecessary" vehicle use. While the Fuel Duty Escalator was introduced with an explicit environmental purpose, critics complained that it was too much of a compromise.
Similarly, it is argued that although the price of fuel has risen in absolute terms, it is falling in real terms. In August 2004, the House of Commons Environmental Audit Select Committee claimed that petrol was 10 per cent cheaper in real terms than in 2000, and that the revenue from environmental taxes was at its lowest since 1993.
Opponents of the fuel duty regime reject this approach as ignoring a number of important factors. People living in rural areas, it is argued, cannot be driven onto public transport by high duties in the way that the environmental lobby demands, because the facilities are inadequate. It is widely argued that a car is a necessity for rural people, not a luxury.
More widely, it is frequently argued that public transport everywhere is not good enough to encourage people out of their cars, and that as such, higher duties result in nothing more than financial penalties for drivers. The state of the transport infrastructure, and the levels of taxation extracted from motorists in general, are a widespread cause of resentment amongst the general public.
It is also pointed out that fuel prices are much higher in the UK than in much of the rest of Europe. This has produced a duty evasion problem, although this is largely confined to international road haulage.
Government response to these pressures has paralleled that taken in relation to Vehicle Excise Duty. It has sought to incentivise the use of more environmentally-friendly fuels by providing discounts. However, this too has been criticised: it is argued that the discounts are too small to encourage the wider distribution of these fuels, and that as such, the benefits will not be widely felt.
More recently the combination of increased fuel duty and a record high 20% VAT rate has attracted considerable criticism, particularly from organisations such as the Freight Transport Association and the RAC Foundation.
By way of mitigation the Coalition government stated that as part of its commitment to help with fuel costs in remote rural areas it was considering introducing a fuel duty discount in such areas. Subsequently the Chief Secretary to the Treasury, Danny Alexander, announced in October 2010 that a pilot scheme would be introduced that would deliver a maximum of 5 pence per litre duty discount on petrol and diesel in the Inner and Outer Hebrides, the Northern Isles, and the Isles of Scilly.
In his March 2011 Budget, Chancellor George Osborne acknowledged that the price of petrol "has become a huge burden on families" and that price rises had also hit businesses hard, "especially small businesses."
He also noted that oil companies were making "unexpected profits" which were "far higher" than those on which their investment decisions had been based. As Britain, unlike other oil-producing companies, does not have a tax regime which automatically regulates returns when prices rise, the Chancellor decided instead to introduce a Fair Fuel Stabiliser.
The supplementary charge levied on oil and gas production would increase from 20% to 32%. Even after this, according to the Chancellor, profits on a barrel of oil were forecast to be higher in the next five years than in the previous five years, raising £2 billion in additional revenue.
This would enable planned inflation rises in fuel duty to be delayed and the fuel duty escalator to be cancelled. However, the Chancellor cautioned that, as he did not wish investment in the North Sea to be lost, if there was a sustained fall below USD 75 in the oil price, then the escalator would be reintroduced.
The decision to further postpone the fuel duty rise planned for August 2012 until the following January, although welcomed by motorists, was criticised by the Opposition who accused the Government of "yet another Budget U-turn". But the Chancellor, announcing the decision in the Commons, said the Coalition was "on the side of working families and businesses" and that the change would "fuel our recovery at this very difficult economic time for the world."
He also rejected claims that the £550 million cost of the move showed the Government was failing in its pledge to prioritise deficit reduction, insisting that the cost would be covered by "larger than forecast" savings in departmental budgets.
The main fuel duty rate will be cut by 1 penny per litre from 18:00 on 23 March 2011.
The main fuel duty rate will increase by 3.02 pence per litre on 1 January 2012.
The 2012-13 increase in fuel duty will be implemented on 1 August 2012.
Source: HMRC – 2011
We will now stop any rise in fuel duty this August and freeze it for the rest of the year.
Fuel duty will be 10 pence a litre lower than planned by the last Labour government.
Chancellor George Osborne - June 2012
"Let’s be clear about what’s within our control and what is not – so we don’t raise false hopes.
"British Governments are not in charge of the world’s oil price.
"As we’ve seen, events like those in the Middle East can push the cost of petrol at the pump higher.
"But British Governments are in charge of the duty we levy on petrol."
Chancellor George Osborne - Budget statement 2012