Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 480 - 499)



  480. Perhaps you can clear up a small misunderstanding. We know that the price of fuel rises and falls in the world market—a barrel of Brent crude and what-have-you—but what we are not very sure about is whether it falls as quickly as it rises at the pump when the price at Rotterdam increases or falls. One of the things that has disturbed some of us from early December is the fact that we were hearing about ever-dropping world oil prices but when we went to put our petrol in our cars we did not see any drop until about the middle of January. Is the ever-vigilant OFT looking at this issue? One would have thought that some kind of small bell might have gone off in the OFT saying "Ah, prices are coming down, why don't they come down at the pump?" It seemed that it was only after Christmas, after the New Year, when the supermarkets started to have to attract people back into their stores rather than keeping them out (as they have to do round about Christmas), that the loss-leader element came into the equation once again. Am I being unduly cynical?
  (Mr Hain) I would never accuse you of that, Chairman.

  481. That is very generous of you, but that may not be correct.
  (Mr Hain) I think you put a fair question and I will attempt to answer it. I recall that the Director General of Fair Trading said on 21 November that a combination of higher world oil prices and public pressure on the United Kingdom retail market had resulted in a squeeze on petrol margins, and that, therefore, because they had been squeezed so much the price reductions were not immediately passed on. However, we will certainly encourage everybody to be very vigilant about what exactly is happening in the petrol and diesel markets, so that if there are reduced world oil prices then the customer should benefit at the filling station.

  482. So should I advise my constituents when they come and complain to me about oil prices going back up to write a letter to John Brown of BP saying "I am sorry, Mr Brown, I have been squeezed rather badly lately and, therefore, the price rise that you have instituted I will not be able to pay in total, so I am only giving you 73p a gallon at the moment because I realise, as you do, that when times are hard we cannot always pass on the benefits to other people"? This is a rather insulting argument to most intelligent people, I would have thought.
  (Mr Hain) It might be worth a try!

  483. "I will see you in court", I think is the rejoinder to that.
  (Mr Hain) To take your point seriously, Chairman, we are very concerned—and I know we are going to discuss gas prices later—with Ofgem, with the OFT and with DTI, between us, that the retail petrol and diesel market operates in Britain in a very competitive and fair fashion. Everything we have done (and, I think, to be fair, our predecessors as well) has sought to achieve that. When you look at the very, very tight margins, some of them—told to me by independents who came to see me last week—as low as 0.05p or 0.08p a litre on each litre sold across the forecourts, these are very tight margins indeed, and there is a highly competitive market. If there were to be any uncompetitive behaviour the OFT would step in in a flash, and we would certainly monitor in terms of that very quickly.

Mr Laxton

  484. Can you tell me as to how we arrived at the situation last September in the fuel crisis where we had lists of forecourts where key workers could go to obtain fuel and yet they found themselves, on occasions—perhaps more than on occasions—in a position where they were turning into forecourts to find it had been, perhaps, closed or, maybe, the garage had been bulldozed and did not exist? How did we end up in that sort of state of affairs?
  (Mr Hain) Everybody has learnt a lot of lessons from that extraordinary period, including Government, which is why the Prime Minister set up a Task Force and published, on 29 September, as you may recall, a Memorandum of Understanding between the Government, the oil companies, the trade unions, hauliers and the police, to make sure that nothing like that—on the scale that had happened—could recur. There were all sorts of things happening in that period which, I think, deserved answers to. That is one of them.

  485. So you are pretty confident, are you, that the system is now robust, and if—heaven forbid and trust we do not—we indeed had a similar situation again, where people were directed to, perhaps, strategically located forecourts to obtain petrol just for the essential nature of their business, that they would find them open and by far a slicker process to enable them to draw fuel?
  (Mr Hain) As I say, the lessons learnt have been very salutary and, as a result, we have drawn up measures to make sure that fuel supplies are maintained in the event of any future fuel disruption. All the signatories to the task force that I mentioned will take the necessary contingency action to ensure that the supply of fuel is maintained in the event of future protests. If I can just identify the key elements in that agreement: a joint early warning system, co-ordinated contingency plans, joint crisis management systems covering stock levels and location, fuel movements and delivery, and also tackling the potential for intimidation of tanker drivers. So we worked very hard to make sure there is not a recurrence. Obviously, the just-in-time economy is very vulnerable, and that is why we want to ensure that the whole of Government working together, from the Home Office to the DETR, ourselves and others, makes sure this does not happen again. Of course, the order granting emergency powers under the Energy Act runs until 10 September this year.

Ms Perham

  486. Can I just inquire about how the list of key workers was drawn up? I represent nearly all the taxi drivers in London who live in Ilford North, and they were eventually added, I think, a day or two later. It seems to me that people providing transport for getting people driving other transport to work and carrying disabled people as well ought to have been on the list from the start. Do you know how that list was arrived at, and what would happen in future to avoid an obvious thing like that?
  (Mr Hain) May I say the taxi drivers have an excellent Member of Parliament, but I do not know, Chairman, as I was not in office at the time, about how taxi drivers came to be put on the list and in what circumstances. I will check that to make sure that the list is fully comprehensive.


  487. Obviously no Ministers were in taxis at that time.
  (Mr Hain) I think I was probably on a `plane somewhere.

  Chairman: I am not meaning you personally, Minister.

Helen Southworth

  488. The Petrol Retailers' Association gave us evidence about their concerns that the levels of stock held at petrol stations was, really, inadequate in their opinion. In view of the evidence that you have given us on your concerns about the margins for petrol retailers, the reason that petrol retailers were not able to hold what they believe to be adequate stocks was, quite clearly, financial. A significant part of that was the point of taxation. Have you given consideration to changing the point of taxation? What measures are you going to put into place to support an effective level of stock across the country?
  (Mr Timms) We are not looking at changing the point of taxation. I think the tax duty system we have is a pretty efficient one and I think greatly increasing the number of duty points would increase the cost of collecting the duty, and I would not favour that. I think, really, the level of stocks that are held is a matter for the retailers to determine; it is clearly not in their interests if they should run out of petrol because they will lose trade if they do so. I do not think that is a matter for Government to intervene in.

  489. In the evidence we were given it was quite clear that the smaller retailers, who are a very important part of the retail infrastructure, have a very considerable burden paying tax well ahead of the time that they receive payment. Even if you are talking in terms of the individual customer there is a delay and they want to keep that delay as short as possible. However, when you are talking about company accounts, there can be about a week and it can run into months for smaller retailers. The margins are not such that they can actually manage that amount of money and they are holding very inadequate stocks. You are talking about stocks that can hold, maybe, a day-and-a-half to two days' volume.
  (Mr Timms) Surely , that is a commercial matter for the retailers to determine what is in their best commercial interests.

  490. They have determined it and it is to hold low stocks.
  (Mr Timms) The commercial arrangements between them and their customers is clearly a matter for them, but I certainly would not support—and I do not think the Committee would either—changing to an arrangement whereby each petrol retailer did his own duty payments, because that would be an immensely complicated and costly system to administer by comparison to the present system, which is very efficient.


  491. Is the matter, from a slightly different angle on tax, that if petrol is bought in a spot market and comes into the United Kingdom and is delivered to a filling station, tax is paid once it is delivered to the station, whereas if you get it from a refinery you pay the refinery and that that time gap is a significant factor in the price differential between an oil majors filling station and the supermarket filling station, because the supermarkets tend to buy the bulk of but not all their petrol on the spot market? So that there is a difference in taxation, depending on the place where the oil is refined and would it not be better then to have it all charged on the same basis so that there would be equality between supermarkets and the forecourts?
  (Mr Timms) My understanding is that in the case of imported petrol, duty is paid on leaving the import warehouse, which, in terms of time, is not that different from duty paid on leaving a refinery, which, as you say, is the arrangement for United Kingdom refined petrol. So I do not think there is a competitive difference there.

  492. It was put to us sometime ago when we took evidence that there was a differential, and it put the oil companies and their people at a disadvantage against the bulk purchaser on the spot market, which is the practice of the supermarkets.
  (Mr Timms) That certainly is not a concern that has been raised with me by the oil companies.

  Chairman: It was some years ago now, but I know the law has not been changed because I have raised it with Chancellors of differing complexions.

Mr Laxton

  493. The issue was raised by the independent body of retailers, and I think they described it as they get a tanker and have splash into the bottom of the tank to keep them going for a couple of days. That was part of the problem, that they did not hold, even within the capacity they have, a full tank, but just splash a bit of petrol around in the bottom. Clearly, they have not got the turnover that, for example, some of the forecourts owned by petroleum companies or supermarkets have. That was the problem and they claimed that that was the reason why, during the period of the crisis, their supplies were exhausted literally almost overnight; they just do not hold the capacity, and partly the reason for that was the taxation arrangements and the tax point that penalised them, they have to put so much money up front that they cannot afford to do that. It might be worth looking at it.
  (Mr Timms) I would not want to encourage the Committee to believe that we are seriously looking at changes in this area, because we are not. It is a very, very efficient system at the moment. The duty is paid at the point of leaving the refinery or, in the case of imported petrol, at the warehouse. I think to try and introduce a system where duty was paid at every petrol station would be impossibly complicated and expensive, and it is not something I would favour at all. Clearly, as I have said, the stocks that are held by an individual retailer must be for that retailer to determine in their own commercial best interests. I think the arrangements that Peter was referring to have now been put in place to ensure that, if there was to be an attempt at future disruption, then the necessary contingency action would be put in place. I think that is the answer rather than trying to change the tax systems to ease these problems should they arise, as we all hope they will not, in future.


  494. Can I clear up one point? Value Added Tax is imposed upon petrol. When and where is that paid? Perhaps one of the army of assistants can help.
  (Mr Timms) Indeed. I am sure somebody will inform me very shortly. I can provide you with a full answer. It is indeed paid at the petrol station.

  495. Great. So you do collect tax at the petrol station. It cannot be that efficient when you have two systems of paying tax at the present moment already; you pay VAT at the station but it is inconvenient to change it because it is efficient for you—it may not be fair for some of the retailers—therefore it is all right. Is that the deal?
  (Mr Timms) It is efficient, and I think it is in the public interest that the collection of fuel duty should be efficient. The current situation undoubtedly is very efficient and reduces the costs on the public purse as a result.

  496. I know there are some Members of this Committee who are obsessed with regulation—and probably correctly so—but if economic efficiency is being undermined here, if people are being disadvantaged, and some people probably are (I think we have to agree to disagree on this issue of when tax is paid on imported fuel) then one would imagine that if they are already making VAT returns it would not be that onerous to make other forms of payment if it was going to be fairer.
  (Mr Timms) I would not accept that people are being disadvantaged. The point that is being put by the Committee is that the tax point affects the level of stock that an individual retailer keeps, and that may well be the case. However, the only problem I am aware of with that was in the period of fuel disruption, which, hopefully, we are not going to be having again. So I would not accept that retailers are disadvantaged by the current arrangements. Of course, as I am being reminded, there are very significant differences between the way that fuel duty works and the way that VAT works. I would not want to encourage the Committee into thinking that a simple change to the system would allow both to be collected at once.

Mr Chope

  497. One group of retailers who certainly are being disadvantaged by this present situation are the petrol retailers in Northern Ireland, because the amount of fuel being bought in Northern Ireland has dropped by about a half, and that is not because people are driving less but because they are all going to buy their fuel in Southern Ireland and paying duty at half the rate they would otherwise have to pay in Northern Ireland to the Southern Irish Government, which seems to be awash with funds at the moment—perhaps partly because of this system. What are you going to do about this, because it is not just a question of smuggling, it is legitimate, cross-border shopping, which is also happening across the Channel, where people go and fill up their vehicles in the South of Ireland so that they can avoid paying United Kingdom duty. We had evidence from the Post Office on this, which said "Perhaps the best example of this is our instruction for Northern Ireland based vehicles to draw fuel in Eire, despite the fact that this often means vehicles going considerable extra distances". Furthermore, for other trunk services, they require that the way in which their fleet is organised enables the vehicles to be empty in the South of Ireland so that they can fill up with a maximum amount of fuel. That is the Post Office doing that, one of the largest haulage organisations, and that is why the amount of petrol and diesel sold in Northern Ireland has dropped by about a half under this Government. It is ludicrous, is it not?
  (Mr Timms) It sounds as if you are rather trying to make a case for tax harmonisation, or duty harmonisation.

  498. I am making a case for reducing our taxes.
  (Mr Timms) Tax harmonisation is not the policy of the United Kingdom Government. We want to set the levels of duty in order to achieve our objectives, raising revenue for the public purse and environmental objectives as well. However, we are aware of problems across the Northern Ireland land border. I met with representatives of petroleum retailers in Northern Ireland to discuss these matters and, as a result, we have very substantially increased enforcement activity to address the illicit smuggling of fuel across the Northern Ireland border and that has led to greatly increased seizures and much more effective arrangements across the Northern Ireland border than we have had before. Of course, it is the case that if we have different rates of duty in different countries of the EU there is scope for tax competition in all sorts of areas, and that is a position that the Government is entirely relaxed about, and actually thinks tax competition has a number of benefits.

  499. Surely, in Northern Ireland the result of that is that we actually get less for the taxpayer from the duty on fuel in Northern Ireland than we would get if the duty was significantly reduced. It is the same problem as taxing cigarettes and alcohol too highly, because it encourages people to go cross-border shopping.
  (Mr Timms) I am not sure what deduction you are drawing from that. If you are suggesting that there ought to be a different rate of duty in Northern Ireland—

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