Should we cut VAT on petrol as filling up a car breaks £100?

Petrol prices saw their biggest daily jump in 17 years this week, an event that was swiftly followed by the cost of filling up the average car breaking the £100 mark.

Fuel prices are at record highs, but the RAC has warned that ‘we are still some way from the peak’ – diesel and then petrol are widely forecast to top £2 a litre over the summer.

Are we now in the kind of exceptional circumstances that warrant a VAT cut to take some of the sting out of rising fuel prices?

After Tuesday’s record rise, the RAC reported that fuel prices kept going up and yesterday unleaded reached 182.31p on average and diesel 188.05p.

At current rates the cost of filling up a 55-litre petrol family car is put at £100.27 by the RAC, while the same sized tank of diesel is £103.43.

The early days of the first Covid lockdown when petrol pump prices slipped below £1 seem a long way away.

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

It was an exceptional circumstance and as tends to happen in markets, prices swung too far one way: a barrel of Brent Crude oil fell towards $20 and the West Texas Intermediate measure went briefly negative.

We are still riding the disruptive economic rollercoaster of the Covid pandemic, and combined with Russia’s invasion of Ukraine and the energy crunch, this has sent the price of oil rocketing.

Brent Crude is trading at about $120 a barrel and the falling pound against the dollar has exacerbated the impact for British motorists when it comes to petrol and diesel prices.

But what also plays a major factor in the cost of filling up is tax.

Figures from the RAC show that taxes account for 46 per cent of a litre of unleaded petrol.

Before yesterday’s rise, a litre of E10 unleaded cost 180.73p, of that 52.95p is fuel duty and 30.12p is VAT.

A quirk of our double taxation system on petrol and diesel is that VAT is charged on the fuel duty, so we pay tax on a tax.

Fuel duty was temporarily cut by 5p in the Budget, which briefly lowered prices although often not by as much as it should have done. However, the rising oil price and tumbling pound have since more than swallowed up any savings for motorists.

There have been calls for a further fuel duty cut, but perhaps it is VAT we should be targeting too.

There are two points in favour: VAT revenue on fuel climbs as petrol prices climb and emergency VAT cuts have been a tried and tested tool in successive Chancellor’s arsenals.

A VAT cut is relatively easy to implement and reverse and a substantial one could make a big difference to what for most people is an essential expense.

If they live outside London or a handful of major cities, they often rely on their car to get to work, get their children to school or just get around.

There is an environmental argument against tax cuts on petrol: making driving cheaper encourages people to use their cars more rather than less polluting means of travel, such as public transport, walking or cycling.

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

There’s also probably likely to be far more damage done to the attraction of using public transport by the summer of pain promised to us by striking unions on the railways than a temporary cost of living crunch VAT cut on petrol.

The risk remains that a VAT cut on petrol is attacked as regressive by opponents, as the poorest in society are least likely to have cars, yet car ownership and reliance is so widespread that I’m not so sure this argument against it stacks up.

Boris Johnson is said to be desperate for some cost of living crisis help ideas, I’m not convinced Rishi Sunak would go for it, but easing the double tax whammy on filling up a car before petrol hits £2 a litre might go down well.