Will the government be reviewing VAT on fuel at the next Budget?

The cost of fuel is skyrocketing and as many households continue to feel the squeeze from the cost of living, it’s a cruel shock that further rises are on the way. While geopolitical issues impact some of the increases, there is an area the government could help – VAT.

The hidden tax in the price at the pump

Fuel duty was frozen at the last Budget, but that freeze is due to come to an end on 1 January 2027. From that date motorists will be seeing a rise in the cost of fuel at the pump, so there is growing interest in whether that increase could be delayed.

There are, of course, significant costs involved before fuel even reaches the forecourt from extracting and refining the oil through to transportation, distribution and selling it at the pump. However, fuel duty is then added to the price, and, on top of that, VAT is charged at 20% on the relevant selling price.

This creates an interesting situation when the underlying cost of oil rises. The more expensive the fuel becomes, the more VAT can be collected on each litre sold. So, while motorists are feeling the impact of higher oil prices in their wallets, the Treasury can also benefit from increased VAT receipts.

And yet, the additional VAT generated by higher pump prices is rarely part of the conversation around fuel duty.

Could the January increase be delayed?

With fuel prices already elevated, delaying the planned 1 January fuel duty increase could provide some relief for households and businesses. It would also raise an interesting question about the Government's overall tax take from fuel.

If the Treasury is already receiving additional VAT as a consequence of higher pump prices, does that need to be taken into account when deciding whether to increase fuel duty further?

The issue is particularly relevant because fuel costs have a much wider economic impact. Higher transport costs can feed into the cost of goods, services and business operations, potentially adding to inflationary pressures.

The VAT question

The Government needs to raise revenue, but fuel taxation illustrates the difficult balance the Chancellor faces.

That creates an uncomfortable question ahead of the Budget. If motorists are already paying significantly more because of higher oil prices, how much additional VAT has the Treasury been collecting as a result?

The Chancellor may therefore have to consider not just whether fuel duty should rise on 1 January, but the combined tax take from fuel duty and VAT and whether increasing one is necessary when the other may already be generating additional revenue.

For motorists and businesses, the Budget could reveal whether the Government sees the current pressure at the pump as a reason to hold back on fuel duty – or an opportunity to raise yet more revenue.

The Monahans tax team will be watching the Budget closely on 30^th October to see what’s in store.