The UK government has generated an additional £1 billion in Value Added Tax (VAT) from fuel sales, a direct consequence of elevated petrol prices attributed to the ongoing conflict in Iran. This windfall comes as motorists have collectively spent an extra £6 billion on fuel since the conflict began on February 28, according to recent analysis.
The 20 percent VAT levy means that higher pump prices translate into increased revenue for the Treasury. This development has led to renewed calls for the government to cancel a planned increase in Fuel Duty set to take effect in the new year. The existing 5 pence per litre cut in Fuel Duty, initially implemented in 2022 following Russia's invasion of Ukraine, is scheduled to expire on January 1. The government is reportedly considering reversing this reduction to help fund new Prime Minister Andy Burnham's spending initiatives.
Analysis from the RAC Foundation tracked fuel consumption and average pump prices since February 28, comparing them to pre-conflict rates. Drivers of diesel vehicles, including tradespeople and hauliers, have incurred an additional £4.3 billion in costs, contributing approximately £713 million to Treasury coffers through VAT. Petrol drivers have spent an extra £1.7 billion, with VAT revenue increasing by £289 million.
"This tax-gouging Labour government has shovelled £1 billion in extra VAT out of motorists’ pockets, yet still persists in another tax hike at the pumps next year," stated Tory shadow transport minister Greg Smith. "It’s an absolute moral necessity to scrap the Fuel Duty hike without delay."
Howard Cox, founder of the FairFuelUK campaign, noted that many other countries have implemented measures to shield their drivers from rising crude oil prices. "Our Treasury has instead wallowed in a still-rising £1 billion VAT windfall on petrol and diesel since the Iran crisis – leaving over-taxed British motorists and the economy high and dry," Cox said. "John Healey must freeze Fuel Duty for this Parliament’s life: cheaper fuel drives growth, not Treasury greed."
As of the report's publication, average petrol prices stood at 161.46 pence per litre, with diesel at 181.84 pence per litre. This means filling a typical 55-litre tank in a family car costs approximately £15 more for petrol and £20 more for diesel than before the conflict began.
Fuel prices have experienced significant volatility since the conflict started, impacting Western oil supplies due to disruptions in the Strait of Hormuz. Prices surged for several weeks after February 28 but began to decrease following a tentative peace deal between the US and Iran in June. However, prices have climbed again in recent weeks after the breakdown of that deal and the resumption of US strikes on Iran.
Prior to the conflict, approximately 130 ships per day transited the Strait of Hormuz, a vital waterway through which about a fifth of global oil supply—roughly 20 million barrels daily—passes. Current reports indicate only eight ships passed through on a recent Tuesday. Oil prices for Brent crude were around $90 per barrel, having reached $100 last month. Price reductions at the pump typically lag behind fluctuations in crude oil prices, explaining continued increases in July and August.
Treasury sources indicated that a decision regarding Fuel Duty would be made during Chancellor John Healey's first Budget, scheduled for October 28.