Booming sales of low-emission eco cars could slash the amount the government raises from road tax. The result could mean tax increases for all but the most economical cars.
A new report has revealed that nearly seven in 10 new car buyers now pay no road tax during their first year of ownership. The average new car sold in the UK last year pumped out 124.6g/km of carbon dioxide (CO2), less than the EU’s target of 130g/km. But this could affect the cost of motoring for all of us, the Society of Motor Manufacturers and Traders (SMMT) says.
Eco cars: How road tax works
Drivers are encouraged to buy low polluting cars because they attract cheaper road tax or Vehicle Excise Duty (VED). Owners of cars that emit less than 130g/km of CO2 pay no VED for the first year of ownership. Cars pumping out less than 100g/km currently pay no VED at all.
Eco cars: Tax dodgers
According to the SMMT, a record 69 per cent of drivers avoided paying road tax over the last 12 months. If current trends continue, the SMMT report says that within 10 years, three quarters of new cars will pay no road tax at all. Currently big-selling models such as the Volkswagen Golf, Ford Fiesta, Ford Focus and Nissan Qashqai all have versions that emit less than 100g/km of CO2 and are therefore road tax exempt.
Eco cars: Plummeting revenues
The result has already seen tax revenues falling. However, the EU-wide target is for the average new-car CO2 emissions to be 95g/km by 2020. If the uptake of eco cars continues as predicted, the annual tax take from VED will fall dramatically. In 2013 it was £5.7 billion or 1.2 per cent of all tax revenue. In 2025 it could fall to £4.4 billion. When that’s adjusted to take inflation into account, it means road tax revenues will drop by almost half over the next decade.
Eco cars: How the Government could raise money
If the government wants to keep pace with current tax revenues without tinkering with road tax, it will have to raise money in other ways. The report says this could include motoring policies such as the London Congestion Charge, Ultra Low Emissions Zone charging, company car taxes and work place parking charges.
Eco cars: Tax hikes for dirtier models
The SMMT report recommends the government restructures VED. It suggests the current Band A is altered to accommodate ever cleaner cars. It says: “Our modelling forecasts suggest that extending the tax base to include all cars with CO2 emissions of 50g/km or above would more than maintain the current tax base in 2025.” If this didn’t happen there would have to be significant tax hikes for less fuel efficient models. Vehicles in Band B emitting between 101g/km and 110g/km would have to pay £163, up from the current £20. The dirtiest Band M cars that emit more than 255g/km would see their tax hiked from £505 to £823 a year.
Eco cars: What the experts say
The SMMT report concludes, logically, that drivers who choose cars with ever lower CO2 emissions is positive for the planet, negative for the treasury. It said: “Unless regulators choose to alter the regime in the near future, government revenues from VED will decline to unsustainable levels.” SMMT chief executive Mike Hawes added: “Striking the delicate balance between influencing buying behaviour, encouraging investment and maintaining critical tax income will be a big challenge.”