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Chancellor urged to offer fuel tax relief

The Chancellor should introduce a variable tax on fuel in order to soften the blow of record oil prices on consumers and businesses, according to the RAC Foundation.

It believes urgent action is needed as the sharp rise in fuel prices has pushed the level of inflation to its highest level in more than eight years. The price of crude oil is reaching new highs and is approaching the record levels seen in 1977. This situation may be further exacerbated by last week’s storm in the Gulf of Mexico.

Some analysts are predicting the cost of oil may hit $100 per barrel and while there is little that Government can do to influence world oil prices, the RAC Foundation says it does have the power to affect pump prices by varying the amount taken in taxation from every litre. For example, if the pump price was 80.9 pence (average price last year) per litre: 16.3 pence represents the cost of the product, 5.3 pence goes to the oil company/retailer to cover costs of supply, filling station operation and profit and 59.3 pence goes to the Government in duty and tax.

Fuel excise duty is charged at the fixed rate of 47.1 pence per litre on unleaded and diesel, and on top of this - VAT is charged at 17.5 per cent. So, at last year’s prices, the duty and tax element made up three quarters of the pump price.

Government collects £22.1 billion a year from fuel duty plus £5.6 billion from VAT on fuel so in effect, sets the price that motorists pay at the pump. In total, over £42 billion per year is collected in road user taxes - with only a small proportion spent on maintaining or improving the road network.

Edmund King, executive director of the RAC Foundation, said: "In light of the record world oil prices and instability in the markets the Chancellor should help to stabilise fuel prices by introducing a variable tax.

"Current hikes are fuelling inflation and hitting those low-income and rural car dependent motorists hardest. The Chancellor could and should introduce a mechanism whereby fuel duty is reduced if world prices hit a certain level and increased if they fall below another level. The Treasury would still benefit from increased VAT returns if prices go up.

"Such a system would bring relief to many millions of motorists and hauliers whilst helping to reduce hardship and increased inflation. It would help people to plan their spending on essential travel."

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