Vehicle Excise Duty Reform – HM Treasury Consultation

The Government has announced a public consultation on reforming Vehicle Excise Duty – the tax you pay each year to the Government just for owning a car. If you read the consultation document (see link below), you will find that it is indeed very irrational at present. Rates vary depending on the age of the vehicle, the fuel type and on its CO2 emissions. But vehicles whose initial retail cost was over £40,000 pay more for the first 5 years, and all vehicles pay more for the first year of registration. A summary of the rates is present here:

You can see it is exceedingly complex and it’s very difficult to quickly work out what the cost of VED will be on either a new or second-hand car. It is not at all clear what the Government was trying to achieve with the present structure so it is certainly ripe for reform.

There are hints that the objective was to encourage the purchase of those vehicles that produce lower emissions, but then why should one discourage the purchase of new vehicles, which generally emit lower emissions, by having a very high first-year rate? The existing structure also encourages drivers to keep their old vehicles, unless they are registered before 2017. And why impose a higher “first-year” rate when surely very few people will keep a vehicle for just one year from new if they have any sense.

The attempt to reduce carbon emissions by having higher VED rates for higher CO2 emission vehicles is also apparently failing as the average emissions of new cars has been rising.

There is some rationality in having VED relate to fuel consumption, at least if you ignore electric vehicles, because it enables the tax to relate to how wealthy the drivers are. If they can afford to run larger vehicles and pay high fuel costs, then they can probably afford higher VED tax. That’s a sound economic principle where one charges more to those who can afford to pay.

The Government now proposes a granular system based on carbon emissions. That might apply to both older and new vehicles. That makes a lot of sense. But why base it on CO2 emissions rather than the initial price of the vehicle? The Government could raise a lot more money from VED by such a structure. In the current epidemic and economic crisis they are going to need all they can get.

But the Government has this paranoia about reducing transport carbon emissions to zero by 2050, if not sooner. Many people think this is just hysteria, and it leaves the problem unsolved of how to tax electric vehicles. These have just as high total emissions over their lifetime, if not higher, than petrol or diesel vehicles, but the emissions are very high during construction, and lower when being operated – assuming the electricity they consume is mainly generated by renewable resources.

The current VED rate for pure electric vehicles is zero, but hybrid vehicles are another cause for complexity. Some may have very low emissions if only driven short distances whereas others may be more like conventional petrol vehicles.

There is also the problem that continual changes to VED rates baffle consumers and raise objections that one might buy a vehicle based on current rates to later find the tax rate has changed. Retaining current rates for vehicles already registered might be preferred by some but that would result in more complexity for purchasers of second hand vehicles when it is surely time to simplify the whole structure. The solution to the concerns of drivers of older vehicles that they might face an abrupt increase in VED, making such vehicles unsaleable or cause them to be scrapped when they are otherwise perfectly useable, is to ensure that any new rates do not impose an abrupt change on any existing vehicles and that plenty of notice is given of the change.

In summary, this writer would support the reform of VED so that a more graduated rate of tax applies. But the graduation should be based on the initial list price of the vehicle when new. That would be simple to apply and remove any discrimination between different vehicle types. Alternatively it could be based on the weight of the vehicle which would be even simpler to apply and would directly relate to the energy needed to propel the vehicle.

The VED Consultation Note is here (readers are encouraged to submit their own comments):


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