Government considers 'pay as you drive' tax to fill £40 billion deficit caused by EVs

Government considers 'pay as you drive' tax to fill £40 billion deficit caused by EVs

18 October 2021 | Kate Kozlowska | 7 min read

Although electric vehicles have higher upfront costs, they are cheaper to operate than similar diesel or petrol vehicles. This is undoubtedly good news for owners, but governments all over the world are losing tax revenue. 

Electric vehicles could lead to a £40 billion tax gap

New petrol and diesel cars will be banned from 2030, which could significantly help the UK meet its 2050 carbon emission targets. The deadline was originally set for 2040 but has been pushed back twice - first to 2035, then to 2030

Huw Merriman, Chair of the Transport Committee, said: “The government decision to bring forward the ban on the sale of new petrol, hybrid and diesel cars, [..] is considered a vital step along the UK’s path to net zero. This inquiry will help us get into the details and practicalities of the policy and the financial implications."

"A consequence of the transition to electric vehicles is a potential £40 billion annual fiscal black hole, due to the reduction in Fuel Duty and Vehicle Excise Duty.” 

Fuel duty and road tax revenue decline as EVs become more popular

EV sales continue to rise, and fewer people are paying vehicle excise duty (VED), also known as road tax or vehicle tax. In addition, the government loses out on fuel duty since electric cars and electric vans do not have to pay road taxes since they do not emit any emissions. Electric vehicles are powered by electric batteries rather than combustion engines.

In the first year alone, the UK government loses £1,000 in fuel duty and emissions-based taxes when someone switches to an EV, according to research from The Sunday Times Driving. In light of the fact that over 50% of petrol's cost is duties and taxes, it isn't surprising. 

According to the report, a petrol driver switching to an electric vehicle saves an average of £592 in excise and VAT, and £305 in the emission-based tax. Diesel drivers save even more when they switch to EVs: £800 a year in fuel duty, and another £338 in taxes.

What will the government do to fill this gap?

Government considers 'pay-as-you-drive' tax to cover the shortfall

Toll roads are a possibility that has been discussed widely - a 'pay as you go' or a 'pay by the mile' tax charged to drivers to use roads. Money raised from this would then be channelled back into improving the infrastructure specifically for electric vehicles. It doesn't seem so bad if this is the case, as EV drivers would eventually see the benefit of the payment.

A road tax similar to this was introduced by Tony Blair's government in 2007. The attempt to relieve congestion was initially intended to reduce traffic congestion, but it wasn't well-received by drivers and was ultimately abandoned. 

Reports indicate that the Chancellor of the Exchequer, Rishi Sunak, is interested in bringing back the pay as you go system to fill 40 billion pounds revenue hole caused by the EVs.   

Merriman further explains: “We will be exploring whether radical road pricing or ‘pay-as-you-drive’ schemes can offer a revenue-raising solution to this problem."

"We will explore the practicalities of different schemes, the level of public support for them, and best practice from other countries."

"We will also assess whether new technologies and pricing can both be utilised to incentivise consumer behaviour change, reduce congestion and promote active travel.”

In addition, this idea may further encourage motorists to switch to electric vehicles. Adding the new road tolls to the fuel duty and emission tax that non-electric vehicle drivers already pay would substantially raise the running costs of their vehicles if the "pay as you drive" tax was introduced.

Will the 'pay as you go' vehicle tax apply to EVs?

Although EVs are relatively more expensive to lease, they are attractive to customers because they are low running costs and, of course, there's no VED. As we discussed previously, electric vehicles don't pay any vehicle taxes because they emit no carbon from tailpipes.

Electric vehicle drivers could lose the zero EV road tax benefit if the "pay as you go" vehicle tax is introduced.  

The financial benefits of buying or leasing an EV may decrease if the changes are implemented too soon. This might discourage many drivers from switching. At a time when the country is preparing to ban the sale of petrol and diesel vehicles, it will send a negative message if electric vehicles suddenly become expensive to run, especially when the government has often praised them as more economical than combustion engines. 

How is the government supporting the UK's EV adoption?

The government is investing in electric vehicle infrastructure, no doubt about it.

It has allocated £1 billion for the electrification of UK vehicles and their supply chains. Furthermore, the government also plans to invest in charging infrastructure, with £1.3 billion going toward installing charging points near homes and workplaces.

Also available are low-emission vehicles grants, which bring the cost of EVs down and are available both when you buy and when you lease an EV. 

Summary

As a result of the switch to electric vehicles, Denmark forecast that it would lose $904 million in fuel and vehicle taxes. It is true that stories like these are concerning for the future costs of driving an EV, but they also point to a larger problem.

Fuel has become so crucial to government funding that our dependence on it has been exploited. As our dependence on petrol and diesel lessens, governments will have to come up with new revenue streams hence new taxes seem inevitable as EVs become more common.

 

For now, we have nothing to worry about.  With CVC, customers can still enjoy the savings on running costs when leasing an electric van. Explore our latest offers below.  

ELECTRIC VAN OFFERS

 



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