Falling revenues prompt vehicle tax reform. - 19th Jun 2012 9:08am
Greener cars mean cheaper vehicle tax but that may be set to change.
Most governments have a policy of "if it moves, tax it", and that's certainly always been the case with cars.
Excise duty on road vehicles was first launched in the 1888 Budget and a new excise duty specifically for motor vehicles was introduced in 1920.
Vehicle Excise Duty (VED) is collected and enforced by the Driver and Vehicle Licensing Agency (DVLA).
It's often referred to as road tax but this is inaccurate as the money raised doesn't go towards upkeep of the roads but is diverted into central government revenues.
Money raised
Currently VED raises about £6 billion a year for the Treasury.
However, official forecasts show that is set to change because the current system and changes in consumer buying habits have led to falling revenues.
Since 2005, VED has been graduated, with higher rates for gas-guzzling cars and lower or free rates for cars with low emissions.
For example, VED for cars in top band M is £1,030 on first sale and £475 a year thereafter. This includes most Range rovers and the Porsche 911.
For mid-range cars in band H, such as some models of the Ford Focus and VW Golf, the cost is £275 in their first year and £195 in future years.
Rewards for fuel-efficiency
However, low-emission cars such as the Nissan Leaf, Toyota Prius and Ford Fiesta Econetic in band A, with no VED payment required.
With the rising cost of Fuel and increased car insurance premiums, many motorists are opting for greener vehicles that cost less to fill up and have lower, or no, VED costs.
"This policy has proved successful in that motorists are increasingly buying more fuel-efficient cars," says Kieran Puffet, editor of car buying website Parkers.
"Also, manufacturers are getting better at making vehicles with low emissions so there is more choice than previously."
This is excellent from an environmental point of view, but the result is that people are paying less VED – leaving a gap in the Treasury's budget.
Government shortfall
This shortfall has been estimated by the motoring research charity the RAC Foundation as being in the region of £13 billion by 2029.
Professor Stephen Glaister, director of the RAC Foundation, "The irony is that even as ministers encourage us to buy leaner, greener cars, they are forced to consider clawing back the money motorists think they will be saving."
"What the Chancellor gives with one hand he looks to take away with the other.
"People who think they will be financially better off by buying the most eco-friendly cars could be in for a shock as the government looks at ways of shoring up its falling tax revenue."
Tax reform
The government is now considering overhauling the VED system, and motoring groups and other interested parties have been invited to the Treasury to discuss the options.
These range from a pay as you drive approach, to a single tax charge on new cars at the point of sale.
In the March Budget, Chancellor George Osborne outlined
plans to introduce direct debit payments for road for vehicle tax.
A spokesperson for the Treasury insisted that there are "no firm plans" for changes in vehicle tax rates.
But Sue Robinson, director of the Retail Motor Industry (RMI), says: "The government has indicated that it will look to review and reform VED as revenues fall due to consumers driving more fuel efficient vehicles.
Uncertainty
"What this reform will look like is difficult to predict but may be related to road usage, using factors such as mileage or peak time use.
"It is also possible that the government will slightly adjust the current system and increase VED based on carbon emissions and other environmental factors."
This uncertainty is likely to be particularly difficult for motorists thinking of buying a new car and wanting to know what their future costs will be.
Professor Stephen Glaister says: "Buying a car is a big deal for drivers. They can do without constant changes to tax which could alter their purchasing decisions.
"If nothing else, there needs to be certainty about motoring taxation."
What do you think?
Have you bought a smaller, low-emission motor to benefit from low, or no, vehicle tax? Do you think a reform of the system will end in a worse deal for motorists?
Most governments have a policy of "if it moves, tax it", and that's certainly always been the case with cars.
Excise duty on road vehicles was first launched in the 1888 Budget and a new excise duty specifically for motor vehicles was introduced in 1920.
Vehicle Excise Duty (VED) is collected and enforced by the Driver and Vehicle Licensing Agency (DVLA).
It's often referred to as road tax but this is inaccurate as the money raised doesn't go towards upkeep of the roads but is diverted into central government revenues.
Money raised
Currently VED raises about £6 billion a year for the Treasury.
However, official forecasts show that is set to change because the current system and changes in consumer buying habits have led to falling revenues.
Since 2005, VED has been graduated, with higher rates for gas-guzzling cars and lower or free rates for cars with low emissions.
For example, VED for cars in top band M is £1,030 on first sale and £475 a year thereafter. This includes most Range rovers and the Porsche 911.
For mid-range cars in band H, such as some models of the Ford Focus and VW Golf, the cost is £275 in their first year and £195 in future years.
Rewards for fuel-efficiency
However, low-emission cars such as the Nissan Leaf, Toyota Prius and Ford Fiesta Econetic in band A, with no VED payment required.
With the rising cost of Fuel and increased car insurance premiums, many motorists are opting for greener vehicles that cost less to fill up and have lower, or no, VED costs.
"This policy has proved successful in that motorists are increasingly buying more fuel-efficient cars," says Kieran Puffet, editor of car buying website Parkers.
"Also, manufacturers are getting better at making vehicles with low emissions so there is more choice than previously."
This is excellent from an environmental point of view, but the result is that people are paying less VED – leaving a gap in the Treasury's budget.
Government shortfall
This shortfall has been estimated by the motoring research charity the RAC Foundation as being in the region of £13 billion by 2029.
Professor Stephen Glaister, director of the RAC Foundation, "The irony is that even as ministers encourage us to buy leaner, greener cars, they are forced to consider clawing back the money motorists think they will be saving."
"What the Chancellor gives with one hand he looks to take away with the other.
"People who think they will be financially better off by buying the most eco-friendly cars could be in for a shock as the government looks at ways of shoring up its falling tax revenue."
Tax reform
The government is now considering overhauling the VED system, and motoring groups and other interested parties have been invited to the Treasury to discuss the options.
These range from a pay as you drive approach, to a single tax charge on new cars at the point of sale.
In the March Budget, Chancellor George Osborne outlined
plans to introduce direct debit payments for road for vehicle tax.
A spokesperson for the Treasury insisted that there are "no firm plans" for changes in vehicle tax rates.
But Sue Robinson, director of the Retail Motor Industry (RMI), says: "The government has indicated that it will look to review and reform VED as revenues fall due to consumers driving more fuel efficient vehicles.
Uncertainty
"What this reform will look like is difficult to predict but may be related to road usage, using factors such as mileage or peak time use.
"It is also possible that the government will slightly adjust the current system and increase VED based on carbon emissions and other environmental factors."
This uncertainty is likely to be particularly difficult for motorists thinking of buying a new car and wanting to know what their future costs will be.
Professor Stephen Glaister says: "Buying a car is a big deal for drivers. They can do without constant changes to tax which could alter their purchasing decisions.
"If nothing else, there needs to be certainty about motoring taxation."
What do you think?
Have you bought a smaller, low-emission motor to benefit from low, or no, vehicle tax? Do you think a reform of the system will end in a worse deal for motorists?
