February 7th, 2020 at 4:00 pm
As part of ongoing green commitments and targets, successive Government’s have sought to increase road tax on the most polluting vehicles in an attempt to steer motorists towards the new greener technology of hybrid and electric vehicles.
What is Vehicle Excise Duty?
Vehicle Excise Duty or VED is an annual charge which has been around for a long time. A vehicle tax first appeared in the UK in 1888 and it changed into an excise duty in 1920 when it was specifically earmarked for road construction to support the burgeoning development of the motor car. This ceased in 1937, the road fund licence requirement remained in place but the money was kept in a more general pot where it was combined with other sources of revenue.
Fast forward nearly a century and VED is now looked after by the DVLA. The requirement for a paper disc to be displayed in the vehicle disappeared in October 2014 as records had become digitalised and Automatic Number Plate Recognition or ANPR allowed law enforcement agencies instant identification of vehicles on which the tax had not been paid.
All change in the green debate
Rather ironically in 2001, the then Labour Chancellor, Gordon Brown, introduced a revised system of car tax which linked the levy to the level of carbon dioxide emissions from a vehicle’s tailpipe – in a bid to go more ‘green‘. It was ironic because this move rather encouraged drivers towards diesel cars as they are more fuel-efficient so have lower outputs of carbon dioxide. However, they also emit high levels of other very harmful pollutants but the government of the day was wary of being seen as draconian towards diesel drivers. Hence, there followed a rather unintended rush towards diesel cars.
Vehicles pre 2001 have their VED calculated based on engine size and 1979 cars and earlier can now be registered in the ‘historic vehicles’ class which means they are VED exempt. This is a rolling categorisation so from the 1st April every year, any vehicle which hits its 40th birthday can apply to join this class and lose VED charges and also the requirement for an MOT.
The Conservatives have pledged to end the sale of all diesel and petrol vehicles by 2040 so what will fill the funding gap created by all that lost revenue from VED if the population is driving around in Electric Vehicles?
Currently, pure electric vehicles pay no VED and hybrids meet a reduced charge. PHEVs – Plug-in Electric Hybrids – pay anywhere from £10 to £100 for the first year depending on their levels of CO2 emissions and then £140 for each subsequent year. Any car retailing at £40,000 or higher (ironically, some of the higher specification EVs are in this bracket) will receive an added premium for the first years after registration.
In April 2019, the government confirmed its plan to pay for most road upgrades and repairs (so not new roads) from a raft of taxes levied against motorists. In 2017, the Chancellor had already linked VED to the Retail Prices Index meaning that there will be a nominal annual increase hitherto unseen by drivers. Older more polluting vehicles which are less than 40 years old will be targeted in order to move the UK towards a carbon-neutral status and interestingly, new cars will also incur a premium VED charge of around £65. Currently, only electric vehicles are exempt from VED but as more and more people embrace the new technology, surely there is going to be a large funding gap in the government’s coffers? If everyone drives EVs which are exempt, the government is going to have to dream up new schemes to pick up that loss of revenue, it simply won’t be possible to plug the gap by increasing taxes on the more polluting vehicles, especially diesel, so this is definitely something to watch.
In 2019, the government estimated that unlicensed vehicles in the UK amounted to 1.6% of the motoring population down from 1.8% in 2018. This correlates to around £94 million in lost revenue although some of this money was recovered by law enforcement agencies. But, if you compare that to how much income will disappear once everyone is fully electric, that is going to pale into insignificance compared to the current level of the deficit based on VED avoidance.
You might say that this therefore currently the golden age of electric motoring because, potentially, VED could reappear on these cars once everyone is driving them? After all, the roads will still need to be repaired and maintained. The writing is already on the wall as the Isle of Man has just announced a new tax on the owners of EVs on the island which will bite from April 2020. The charge is £14 per car and has been deliberately positioned to start to fund the gap in the loss of revenue from petrol and diesel vehicles expected over the next decade. And there is also the loss of fuel tax; the government currently collects £0.57.95p per litre at the pumps on petrol, diesel and bioethanol sales which gives the Exchequer £28 billion, a significant gap which will need to be plugged and that’s not including the VAT surcharge in this calculation either.
Some industry experts think an increase in VAT on energy is a possibility. If you charge your EV off-grid, it generates just five pence in the pound VAT for the Treasury. If you are generating your own electricity via either wind power or solar panels then the government gets a big fat zero. Or, in the alternative, some feel a road pricing model is likely as there is already the technology in place to track cars and charge drivers on a per-mile basis.
Don’t get caught out
If your car does qualify for free VED either because you have an EV or a vintage roadster 40 years plus, you still have to apply to renew your road tax even though there is no fee to pay. You should receive an annual renewal reminder and must apply for road tax even though the bill is zero. If you don’t, you run the risk of incurring a fine of up to £1,000. Statistics have revealed that last year, 71,000 fell foul of this law generating fines worth just over £1 million as a result. So the government’s coffers are not quite so empty after all!