## Thursday, March 31, 2011

### Fuel Duty 2

I've mentioned a method of how to cut the cost at the pump, but I didn't go into much details really. I'm going to remedy that here.

From our point of view we see the price at the pump and think "Yeesh!" and then the fuel duty gets dropped by a penny so our price per litre drops by a penny, which isn't right, but what's really going on?

Caveat time I may have this wrong, but from the legislation this seems the process -

The petrol producer has some petrol it wants to sell. A petrol distributor (petrol station) wants to buy some. The producer sets a price and then has to add duty to it; then has to apply VAT. The distributor buys it at that price.

Now the distributor wants to sell it to us. They want to make a profit so add a figure to the purchase price. They now have to add VAT to it. We buy it at that price.

Running with the current petrol price of £1.319 per litre, duty at 57.95p/litre and VAT at 20% I need to make one assumption - the profit the distributor makes is 1p/litre.

Taking that we can work backwards (with rounding)

£1.319/1.2=£1.0992
£1.0992-£0.01=£1.0892

This is the price per litre the distributor bought the petrol at.

£1.0892/1.2=£0.9076
£0.9076-£0.5795=£0.3281

This is the price per litre of raw petrol the producer is selling at.

The duty and VAT go to the government that's:

£0.5795 + £0.1815 from the producer and £0.2198 from the distributor. However the distributor can claim back the VAT on his original purchase. So the producer pays £0.7610 and the distributor £0.0383.

This leaves £0.7993 per litre of the full £1.319 going to the government.

Incidentally this means the distributor would be making no profit at all (£0.01-£0.0383) they'd be losing money.

As an exercise to the reader given a pump price of £1.319 what would be the raw price and the 'profit' added by the retailer such that the profit + VAT reclaimed - VAT paid would equal zero :-)

If you want to show your working out so we're on the same page I use X as the raw fuel price and Y as the profit; you'll need to produce two equations and solve them simultaneous; for those who want to 'cheat' the last part use this excellent little simultaneous equation solver.