Tax impact of electric vehicle uptake revealed in OBR report

Efforts to tackle climate change by transitioning away from fossil fuels are “rapidly eroding” the £39 billion the Government currently receives in tax revenues from petrol and diesel vehicles, according to the Office for Budget Responsibility (OBR).

The Treasury is expected to collect £24.3bn in fuel duty this tax year (2023/24), but the increased take-up of electric vehicles (EVs) is expected to cost £13bn a year in lost fuel duty by 2030, it says.

Several tax bases are at risk of being eroded by behavioural or technological changes. This is particularly true for emissions-linked taxes as the UK transitions to net zero.  

The OBR, in its latest Fiscal risks and sustainability report, says that an acceleration in the uptake is increasing the pace at which fuel duty revenues are eroded.

Think tank the Resolution Foundation recommended a new ‘road duty’ for EVs – levied at around 6p per mile (plus VAT) – to offset a decline in fuel duty, last month.

The Government is yet to indicate how it will plug the predicted shortfall in fuel duty.

The OBR report also highlights how much the 5p cut in fuel duty, announced in Budget 2022,  will cost the Exchequer if maintained.

The Government temporarily extended the 5p cut in this year’s Budget. The OBR says that not proceeding with the planned reversal of the extended 5p cut in 2024/25 and RPI indexations in that year and every year thereafter would reduce revenue by £4bn in 2027-28.

Despite default Government policy stating that the fuel duty rate will rise in line with RPI inflation each year, fuel duty had been frozen at 57.95p a litre between 2011 and 2022, before the 5p reduction to 52.95p a litre.

However, the OBR says that a similar threat to the £7bn collected annually in vehicle excise duty (VED) from EVs has been reduced, thanks to the Government’s decision to make electric cars, vans and motorcycles subject to the tax from April 2025.  

Claire Evans, fleet consultancy director at Zenith, said: “We know that road transport emissions reductions are vital if the government are to meet their 2050 net zero target. What our industry needs to deliver this is certainty.

“While positive steps have been taken, such as the ZEV mandate, confirmation of future benefit in kind rates and a clear roadmap on ending the sale of ICE vehicles, the puzzle is not yet complete.

“As an industry we urgently require clarity and long-term thinking on items such as renewable fuels and how future motoring taxes can replace fuel duty.

“Providing clear direction is vital for our industry to invest with confidence.

“Any area of uncertainty will only lead to a delay in the developments of new products and charging infrastructure that must be in place to support fleet operators and consumers to make cleaner mobility choices.”

The OBR Fiscal risks and sustainability report can be found here.