This note sets out the rules regarding the tax treatment of alcohol and tobacco purchases made by passengers, and sets out proposals the Government has published for reforming these rules in the context of Brexit, and the UK’s departure from the EU single market.
Documents to download
Taxation of road fuels (937 KB, PDF)
Excise duty is charged on most hydrocarbon oils. The two main categories of road fuel – ultra-low sulphur petrol and ultra-low sulphur diesel – are charged duty at 57.95p per litre. When VAT is included, tax represents 62% of the final pump price for petrol, and 61% of the final pump price for diesel (as of September 2019). Fuel duties are estimated to raise £28.2 billion in 2018/19; by comparison duties on all other excisable goods – tobacco products, beer, cider, wine and spirits – are set to raise £21.2 billion in this year.
A commitment to increase the rates of excise duty in real terms each year is often termed a ‘duty escalator’. Over the period 1993-1999 Conservative and Labour governments operated such a policy. By January 1999 tax on both petrol and diesel represented 85% of the final pump price. Over the 1990s, despite regular peaks and troughs, the trend in oil prices was a sustained long-term increase, and by the end of the decade government policy toward taxing road fuels had become highly unpopular. In 1999 the Labour Government suspended the duty escalator, and over the next nine years it increased road fuel duties sporadically, often deferring or cancelling proposed changes in duty rates when oil prices were relatively high.
In his 2009 Budget statement the then Chancellor Alistair Darling announced that in future years fuel duties should rise by 1p a litre above inflation, and in the Budget the following March he proposed the escalator should apply at least until 2014/15; the duty rate rise for 2010/11 would be phased in over the coming tax year in 3 stages to “ease the pressure on businesses and family incomes at a time when other prices are increasing.” Fuel prices continued to rise over the next two years for a number of factors: this increase in duty rates, rising oil prices, a decline in the value of sterling, and the new 20% standard rate of VAT which took effect from 4 January 2011.
In the first Budget of the Coalition Government in June 2010 the Chancellor George Osborne did not change duty rates, but said the Government would be exploring options to stabilize road fuel prices, and consider the case for a fuel duty discount for remote rural areas. In his Budget on 23 March 2011 Mr Osborne proposed three changes to duty rates: an immediate cut in the duty rate by 1p, a suspension in the previous Government’s duty escalator, and a delay in the two duty increases set for April 2011 and April 2012, to keep duty rates in line with inflation. These changes – estimated to cost around £1.9 billion in 2011/12 – would be funded by an increase in the supplementary charge paid by companies in the North Sea on oil and gas production. Mr Osborne stated that if oil prices fell back down ‘on a sustained basis’, this extra supplementary charge would be removed, and the duty escalator would be re-imposed.
However, for the remainder of its period in office the Coalition Government kept fuel duty rates frozen, and in its Autumn Statement in December 2014 announced that “the price based trigger point for changes to both the supplementary charge and fuel duty, set by the Fair Fuel Stabiliser in 2011, will be abolished.” In a review of the Government’s tax policy before the 2015 General Election, the Institute for Fiscal Studies (IFS) noted that “in April 2015, fuel duties will be 15% (10p per litre) lower than if the April 2010 duties had simply been uprated in line with the RPI (a £3.9 billion tax cut) and 22% (16p per litre) lower than if the Coalition had continued with the fuel duty escalator inherited from the previous government (a £6.2 billion tax cut).”
Historically fuel duties have been set without any regional variation. Excise duties are harmonised across the EU, and there is dispensation for individual countries to obtain approval to set differential duty rates. In October 2010 the Government announced plans to introduce a pilot scheme, to provides a 5 pence per litre (ppl) reduction to fuel retailers in the specified rural areas. Having secured clearance at the EU level, the Government introduced the Rural Fuel Duty Relief scheme in March 2012, covering the Inner and Outer Hebrides, Northern Isles, the islands in the Clyde and the Isles of Scilly. With EU approval the scheme was extended to 17 other areas in May 2015. It is estimated that the scheme benefits around 125,000 people living in the UK’s most rural communities.
The Conservative Government has continued to keep duty rates frozen, most recently in the 2018 Budget. The Budget report noted that freezing duty would save “the average driver a cumulative £1,000 by April 2020, compared with what they would have paid under the pre-2010 fuel duty escalator.” The Budget decision to freeze duty rates was estimated to cost £840m – £935m a year, over the next five years, while the total annual cost of duty rate freezes since 2011/12 is now over £8 billion.
Despite the Exchequer cost, this approach to taxing road fuels appears to have cross-party support, and none of the three major parties made any proposals to increase fuel duties in either the 2015 or 2017 General Elections. The Institute for Fiscal Studies looked at the Government’s options for taxing motoring in their Green Budget, published in October 2019; as part of this, the authors considered the distributional impact of fuel duties, finding that duties paid on households’ fuel purchases (both duty and VAT) “are, on average, roughly proportional to household spending, accounting for between 2% and 3% of the non-housing budget for all income groups”:
Among car owners, fuel duties take up a larger share of poorer households’ budgets. But since lower-income households are much less likely to own a car in the first place (in 2015 only half of those in the lowest income decile owned a car, compared with over 90% in the highest income decile), the average budget share across all households is broadly constant over the income distribution (though slightly lower for the poorest tenth and the richest tenth).
That said, “the burden of fuel duties varies widely within income groups”:
Right across the income distribution, around 4–5% of households find fuel duties (and VAT on the duties) consuming more than a tenth of their budget, and it is for these people that rates of fuel duties are a particularly sensitive issue …
A 2015 YouGov survey (YouGov / Times Red Box Survey, March 2015) found that just over half of respondents thought fuel duties were unfair; only inheritance tax received a more unfavourable response. It is particularly striking when contrasted with tobacco duties, which are highly regressive and which many economists would bracket with fuel duties as ‘corrective taxes’ designed to discourage harmful behaviour, but which were considered the fairest of the taxes listed.
Evidently the harms that motoring causes do not make people think of fuel duties as a legitimate ‘sin tax’ like alcohol or tobacco duties. One reason for this may be that many people feel they have little option but to drive – it may be their only way to get to work, for example – and resent being penalised for something they can do nothing about.
In July 2017 the Office for Budget Responsibility published its first Fiscal Risks report, to “to identify specific shocks or pressures that could push the public finances away from our latest medium-term forecast or threaten fiscal sustainability over the longer term.” As part of this the OBR argued that improvements in fuel efficiency, driven by emission standards, posed a serious risk to receipts from fuel duties. The OBR modelled two scenarios: the first, that new car fuel efficiency would continue to improve in line with recent trends, reaching 95gCO2/km in 2030 – around 73 miles per gallon; the second, consistent with recommendations by the Committee on Climate Change, that new car efficiency reached 50gCO2/km by 2030 – around 139 miles per gallon:
Fuel duty is forecast to raise £27.5 billion (1.4 per cent of GDP) in 2017-18 … In both scenarios, receipts continue to fall as a share of GDP beyond 2021-22. By 2030, in our less fuel-efficient scenario they fall to 1.12 per cent of GDP; in the more fuel-efficient scenario they fall to 1.00 per cent of GDP. If the Government meets the Committee on Climate Change recommendation of near-zero emissions from transport by 2050, then fuel duty receipts would tend towards zero on current policy settings.
In its detailed response to the report published the following year, the Treasury simply stated, “the government recognises that these changes may impact tax revenues, but it believes fuel duty will continue to have an important role in the tax system.”
The OBR is required to publish a fiscal risks report every two years, and in its second report, published this July, noted nothing had ‘materially changed’ its view of this risk:
Fuel consumption per adult has remained relatively flat over the past two years despite sustained growth in overall mileages. This implies that the average efficiency of the vehicle stock has continued to rise (albeit at a slower pace than over the 2000s) … Over the medium term, we are now slightly less pessimistic (from a receipts perspective) about overall consumption, although in the longer term the continued trend toward alternatively fuelled vehicles will weigh on receipts. The Government’s 2017 decision to ban the sale of petrol and diesel cars by 2040 would, under a continuation of the current tax system, ultimately reduce receipts to zero.
Two other Library notes discuss the application of the duty escalator in the 1990s, and the Labour Government’s decision to rescind it.
 OBR, Economic and fiscal outlook, CP 50, March 2019 (Table 4.3). The OBR collates statistics on individual taxes on its site, including figures on fuel duties.
 HC Deb 22 April 2009 c244. In addition to the 1p real terms rise set for future years, duties were increased by 2p a litre in September 2009 (Budget 2009, HC 407, April 2009 p153).
 HC Deb 24 March 2010 c254
 HC Deb 23 March 2011 cc964-5; Budget 2011, HC 836, March 2011 para 1.145-49
 Autumn Statement, Cm 8961, December 2014 para 1.127
 Stuart Adam & Barra Roantree, The Coalition Government’s Record on Tax: IFS Briefing Note BN167, March 2015 p19
 HM Treasury press notice 50/10, 9 October 2010
 HC Deb 25 November 2011 c37WS. Provision for the scheme was made by Order (SI 2011/2935).
 See, IFS, General Election 2015: Taxes and benefits: the parties’ plans, April 2015 & General election 2017 manifesto analysis: tax and benefit policies, May 2017.
 HM Treasury, Managing fiscal risks: government response to the 2017 Fiscal risks report, Cm 9647 July 2018 para 4.36
 Taxation of road fuels: the road fuel escalator (1993-2000), CBP3015 & Taxation of road fuels: policy following the ‘fuel crisis’ (2000-2008), CBP3016, 21 January 2011.
Documents to download
Taxation of road fuels (937 KB, PDF)
To support the self-employed through the coronavirus outbreak the Government has introduced the Self-Employment Income Support Scheme (SEISS).
UK tax law is specifically targeted rather than purposive: in tackling the exploitation of loopholes in the law, governments have legislated against individual avoidance schemes as and when these have come to light. This note looks at the case that has been made recently for a general anti-avoidance rule, and the Coalition Government's introduction of a 'narrower' General Anti-Abuse Rule in 2013.