Treasury considers VED reform to plug tax shortfall

Fleets could be punished for leading the environmental agenda and choosing cleaner cars in an overhaul of Vehicle Excise Duty (VED) rules.

The Treasury has confirmed that reforms to VED are currently under discussion with key stakeholders in the motor industry after reports claimed that rising fuel efficiency will lead to a fall in tax revenues.

The move was first reported by Fleet News following the March Budget, when the Government said it wanted to “ensure all motorists continue to make a fair contribution to the sustainability of the public finances”.

It faces a £13 billion shortfall in motoring taxes by the end of next decade, according to a report from the Institute for Fiscal Studies (IFS).

The IFS, which was commissioned to write the report for the RAC Foundation, has based its findings on an analysis of the Government’s own figures.

The scale of the problem is equivalent to increasing the basic rate of income tax from 20p to 23.4p, VAT from 20% to 22.7% or raising fuel duty by more than 50%, the IFS report suggests.

One option being considered to help plug the gap would be to replace VED with a one-off up-front charge on new vehicles when they are sold.

Receipts from motoring taxes total £38.5 billion a year, equivalent to 7% of all Treasury income, with the Office for Budget responsibility putting income from VED at £5.8 billion a year.

Under the current system, cars fall into 13 payment bands depending on their level of carbon emissions, with more polluting vehicles taxed more heavily.

The duty is paid annually, but a higher rate is payable in the first 12 months of a vehicle’s registration.

Cars with CO2 emissions up to 100g/km are currently exempt from paying the duty, while those with emissions up to 130g/km are exempt in the first year.

European regulations aimed at reducing carbon emissions from new cars and improvements in technology are expected to lead to a higher proportion of cars qualifying for the lowest VED bands in the future.

Nearly half of the 1.9 million cars sold in Britain last year had emissions below 130g/km of CO2 and the average fleet car purchased in 2011 had emissions of 137g/km.

Government policy on company car tax has encouraged up-take of low emissions vehicles; but it appears this policy has been too successful.

David Brennan, managing director of LeasePlan, said: “Any revision that penalises drivers for opting for lower emissions vehicles shows complete disregard for the on-going innovations throughout the automotive industry.

“It would appear that tax revenue in this sector is being put ahead of genuine environmental progress in the industry and any such measures could further hamper the weak UK economic recovery.

“With one in 10 vehicles on Britain’s roads being driven by business drivers, additional VED costs have the potential to damage UK industries which are reliant on keeping their people mobile.”

Brennan believes that the Government’s decision to reduce the benefit-in-kind taxation exemption threshold to 99g/km in the most recent budget is already a suitable challenge to car manufacturers and environmentally-conscious fleets.

“Industry and driver efforts to move towards more efficient and environmentally-friendly vehicles should be applauded, rather than viewed as a lost revenue opportunity,” he added.

“LeasePlan has welcomed Government policy in recent years that has encouraged the use of lower emitting vehicles, but this move is ill-advised and would be completely counter-productive.”

However, with the Government facing such a huge shortfall in its tax take in the future, changes to VED would be comparatively minor if ministers instead considered overhauling the structure of motoring taxes as a whole.

The IFS concludes that with congestion in many parts of the country only set to worsen, the Government may have to accept some form of road user charging, with a substantial cut to fuel duty to placate a largely hostile public.

However, while the Liberal Democrats broadly support the idea of road tolls, the Government, which is considering proposals to transfer the management of some roads to the private sector, has ruled out tolls to the existing network – at least in the current Parliament.