Sharp rises in fuel costs have hit UK drivers’ wallets, but that isn’t the case everywhere
British drivers are paying significantly more at the pumps than drivers in several other European countries.
According to RAC data, petrol currently costs around 156p per litre in the UK, compared with roughly 136p in Cyprus, 130p in Spain and 116p in Malta.
Drivers don’t have to refuel too many times before the difference starts hitting their wallets. According to the RAC, filling a 55-litre tank in a typical family car now costs around £87 for petrol and just over £100 for diesel.
Elsewhere in Europe, Polish drivers pay just 122p per litre for petrol, while a litre of petrol costs Bulgarian motorists 131p. If European countries access the same global oil market, and face the same geopolitical challenges, why are petrol and diesel so much more expensive in the UK?
For Luke Bosdet of the AA, the answer is simple. “It’s a tax thing,” he said. “Some countries load their tax onto car ownership – car tax and the like. Others load it on to car use – duty on fuel. And others combine the two.”
At this week’s average petrol price of 152.7p per litre, UK drivers pay 26p in VAT and 53p in fuel duty, according to the RAC. That means 79p of every litre sold is tax, equivalent to just over half of the pump price.
Compare that with Spain, where the cost of a litre of fuel is around 130p. RAC figures show why Spain is cheaper. The fuel and retailer margin account for about 76p in both countries. But rather than the 79p in duty and VAT paid by UK drivers, those in Spain pay 53p.
The Malta outlier
But there are outliers too. In Malta, for example, petrol costs just 116p per litre. Yet based on RAC figures, tax accounts for 56% of the pump price, not dissimilar to the UK tax take despite the much lower pump price.
However, if British drivers think they are hard done by, spare a thought for Dutch motorists who pay 193p per litre of petrol and 182p per litre of diesel.
For Stuart Adam, a senior economist at the Institute for Fiscal Studies (IFS), “the UK is roughly in the middle of the pack in terms of prices and slightly above average in terms of tax rate”.
He said that 20 years ago, the UK had “easily the highest tax rates in terms of both petrol and diesel” but “a series of real-term cuts to fuel duties” has meant that’s no longer the case.
So why is petrol and diesel cheaper in Spain, Malta, Poland and Bulgaria? Steve Gooding, director of the RAC Foundation, said: “More often than not, the fact that fuel prices are cheaper in southern and eastern European countries is likely to reflect government policies, including state-owned fuel production, designed to keep fuel prices down where average wages are also relatively low.”
Take Malta, for example. A spokesperson for the Central Bank of Malta told Autocar that fuel prices have remained stable in recent years due to a “fixed energy price policy”. Through energy subsidies, retail fuel prices have been “maintained at fixed levels despite fluctuations in global oil prices”, the spokesperson said.
Duty and VAT: why doesn’t the government cut it?
In the UK, however, the focus has been on fuel duty. Adam said ministers could reduce it if they wanted to, but it would come at a cost.
“The obvious downside is that it costs the government money and the government has been scratching around for revenue in difficult circumstances for some time,” he said.
Fuel duty and VAT currently raise around £30 billion a year for the Treasury. Adam noted that if this revenue is reduced, the government would have to raise money elsewhere or accept a lower tax take.
Others think ministers should start by cutting VAT on fuel. The RAC Foundation has calculated that since the US-Iran war began in February, the government has taken more than £741 million extra in VAT from higher pump prices, as part of what it calls the “war premium” in terms of the higher costs motorists have faced.
But in Spain, the government reacted to the war in Iran by temporarily reducing VAT on fuel from 21% to 10% in March. Gordon Balmer, executive director of the Petrol Retailers Association, said VAT is “a tax on a tax” because, unlike fuel duty, the amount of VAT collected rises whenever pump prices increase. He added that the government could do something similar to Spain if it wanted to.
“Instead of announcing summer giveaways such as cheap meal deals and days out at the zoo, the government could have helped everyone by introducing a 10% cut in VAT on fuel,” he said.
Adam disagrees. He argues that removing VAT from fuel duty would make very little difference if the overall tax take remained the same. He said: “As things stand we put VAT on the price of fuel including the duty. However, you could equally well have VAT on the price excluding the duty and make up the revenue with a higher duty rate. But you would end up in a very similar place.”
In response, the Treasury told Autocar that the 5p fuel duty cut has been extended until the end of the year and that mileage rates for people who drive for work have increased from 45p to 55p. It also pointed to Fuel Finder, which is designed to help drivers identify the cheapest forecourt nearby.
Taxes don’t tell the whole story
Yet fuel prices are only one part of the cost of motoring. Professor Nigel Driffield, a professor of strategy and international business at Warwick Business School, said: “It is inadvisable to look at one tax in isolation.” He added: “You can compare excise duty and VAT in different countries, but if cars or companies are taxed differently, then the aggregate impact may differ.”
Balmer agrees. He said that several European countries rely much more heavily on toll roads than the UK. “You can actually say the price of fuel is lower, but don’t forget they also charge road tolls. If you are looking at it in terms of motoring, you need to take all of the various taxes into account,” he said.
For Adam, the bigger question is not how fuel taxes compare across Europe, but why governments tax fuel in the first place.
“The more fundamental question is why we have a specific tax on fuel or, for that matter, a specific tax on driving and cars at all?” he said.
Adam said fuel taxes should not simply be used “to raise revenue or support particular groups of motorists”. Instead, he argued that governments should use them to reflect the wider costs of driving, “including carbon emissions, air pollution and congestion”.
Whether motorists agree is another matter entirely.
