New Road Duty Needed To Avoid Electric Vehicle Roll-out Putting Pressure On Britain's Public Finances And Crowded Roads

3rd June 2023

The UK must - and can - urgently reform its £32 billion of road taxes so that the welcome transition to Electric Vehicles (EVs) does not put pressure on the public finances and road congestion, according to new research published today (Thursday) by the Resolution Foundation.

Where the rubber hits the road - the 36th report of The Economy 2030 Inquiry, funded by the Nuffield Foundation - notes that the UK's transition away from fossil-fuel-powered cars is proceeding faster than many experts predicted, with EVs accounting for one-in-seven new cars bought last year.

However, while the rapid take-up of EVs is good news for both the planet and motorists as they are cleaner and cheaper to run - per-mile running costs for EVs are around 60 per cent lower than non-EVs - that also presents pressing challenges for policy makers with half of those lower running costs made up of lower taxation, specifically the lack of Fuel Duty, relative to traditional vehicles.

First, the transition from fossil-fuel-powered cars to largely tax-exempt EVs is creating a growing fiscal hole in the £32 billion of revenues currently collected via Fuel Duty and Vehicle Excise Duty (VED). The EV transition is set to drive a £10 billion a year revenue shortfall by the early 2030s.

Second, the UK has internationally high levels of congestion - we spend one billion hours per year sat in traffic, at a cost of £60 billion – and policy needs to play a greater role in tackling our crowded roads.

The authors note that arguments for continuing with far lower rates of vehicle taxation for EVs to encourage take-up are misplaced, with regulations banning the sale of non-EVs by 2030, and lower running costs generally already playing that role.

With higher-income families more likely to buy new electric cars (two-thirds of new car spending is by the richest fifth of households), maintaining big tax-breaks for EVs risk disadvantaging those on lower incomes who can't afford a new car, says the Foundation.

A new ‘Road Duty' for EVs – levied at around 6p per mile (plus VAT) – would be enough to offset the fall in Fuel Duty revenues over the coming decade, while maintaining incentives to switch with EVs remaining 20 per cent cheaper to run than non-EVs. This new duty could be collected using GPS data that new EVs are already built with, and paid via monthly direct debits to minimise disruption to motorists.

A GPS-collected system of Road Duty could also help tackle a second big net zero and transport challenge facing Britain – decongesting our roads.

The ability to implement congestion charging via this system would make it far easier to tackle congestion in large town and cities – where 81 per cent of all congestion takes place – ending the need to install expensive vehicle recognition CCTV around congestion zones.

While Road Duty should eventually become the main form of vehicle taxation in Britain, the authors add that non-EVs should continue to pay Fuel Duty instead, so that people who can't afford to buy a new car aren't double taxed for doing so.

Finally, the Foundation says that tax policy should avoid reinforcing the ‘pavement tax' – whereby those with access to off-street parking (76 per cent of the richest fifth vs just 56 per cent of the poorest fifth) are able to charge their EVs far cheaper than those reliant on public charging points. The VAT rate on electricity from public charging points (currently 20 per cent) should be reduced to the same 5 per cent for home charging.

Jonny Marshall, Senior Economist at the Resolution Foundation, said, "The switch from fossil-fuel-powered cars to EVs is a key part of Britain's net zero transition, and it’s happening quicker than most people expected. This is good news for the planet and motorists as EVs are cleaner and cheaper to run.

"But unless we modernise road taxation to reflect the cars that are on our streets today and in the future, we risk putting more even pressure on the public finances and our crowded roads.

"We need a new GPS-based ‘Road Duty’ for EVs to offset falling Fuel Duty revenues, and ensure that the Net Zero transition doesn’t leave poorer drivers in older cars bearing the burden of vehicle taxation.

"VAT rates on those using public chargers should also be reduced to the same level enjoyed by those, generally richer households, lucky enough to charge at home.

"Our tax system needs to keep pace with the Electric Vehicle transition, in a way that protects low- and middle-income households."

Where The Rubber Hits the Road

The transition to net zero means that the way we drive is changing, bringing with it the prospect of sharp falls in motoring-related tax revenues. For decades, taxing driving has contributed significantly to tax revenues, but the cheaper motoring that electric-vehicle (EV) drivers enjoy – driven in large part by exemptions to taxes paid by drivers of petrol and diesel vehicles – will see these receipts dwindle. This risks an annual £10 billion black hole in the early 2030s and reaching more than £30 billion per year within the next three decades. So, in this briefing note we discuss how the rapid and welcome uptake of electric vehicles must come with reform of motoring related taxes that protects tax revenues, helps limit congestion, and considers the potentially disproportionate impacts on low-to-middle income households. We have outlined a package of measures that ensure EV drivers start to pay their way but also supports a rapid transition away from petrol and diesel vehicles while not putting the burden on those who cannot afford to switch cars.

Key findings
The transition to EVs is already well underway, with one in seven cars sold in 2022 electric and now more than 1 million EVs on our roads. While this is good news for the UK’s carbon footprint, it comes with significant fiscal implications, the biggest of which is a rapid decline in Fuel Duty receipts, where annual receipts are expected to fall by £10 billion by the early 2030s.

The UK is already blighted by congestion, which will get worse as cheaper-to-drive EVs become the dominant form of transport.
British road speeds are already slower than those in comparator countries, and, absent policy to address it, traffic could increase by a quarter by 2050, impacting productivity and the living standards of those stuck in traffic, or spending time near busy roads. Congestion is also highly concentrated, with more than four fifths of problematic levels in our cities and large towns.

The Government has already acted to reform Vehicle Excise Duty (VED), the UK’s other main transport tax, by extending annual charges to EVs from 2025. While this approach will protect revenues, it will see the tax burden shift from those who can afford new cars (two thirds of all spending on new cars comes from households in the richest two income quintiles) than if reforms protected VED levied at the point of purchase.

VAT is currently levied at a higher rate on electricity from the public–charging network than that used to charge cars at home, forcing drivers who cannot charge at home – 44 per cent of the poorest fifth of households and 49 per cent of private renters – to pay an extra £66 in tax per year.

Policy recommendations
A national, per-mile Road Duty system should be introduced that leads to EV drivers paying 6p per mile (plus VAT) from 2027, when one–in–six of all car miles are expected to be electric. This should be implemented through a GPS system, building on existing technology. Drivers of fossil–fuelled vehicles will continue to pay Fuel Duty.

Local areas should be empowered to introduce Congestion Charging, with a focus on the nation’s cities and large towns. Enabled by, and interlinked with, the national GPS system, this will avoid the need for costly infrastructure and allow simple billing.

Reforms to VED should go further than existing Government plans, with at-purchase VED modernised such that it is based on vehicle weight – with a per-kg charge for all vehicles above a certain weight limit.

VAT on public chargers should be reduced from 20 per cent to 5 per cent, matching that enjoyed by motorists able to charge at home. Costs should be recouped from other motoring taxes, with a higher rate on upfront VED likely to be the most progressive option.

Read the full report HERE
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