As electric cars become more common, fuel duty revenues decrease. Could a tax reform be on the cards?
Concerns about pay-per-mile road charging are growing as people begin to question how the Treasury plans to recover the duty lost from the decline in sales of petrol and diesel cars
Electric cars generate no fuel duty, so as their registrations continue to climb – up 38% year on year – and with the forthcoming zero-emission vehicle (ZEV) mandate likely to boost their sales still further, questions are being raised.
Fuel duty, which heavily dictates fuel pricing, is currently 52.95p per litre and is expected to earn the Treasury £24.3 billion in the 2023-24 financial year. That would represent 2.3% of all tax receipts and is equivalent to £867 per household and 0.9% of national income.
When could pay-per-mile road charging come in?
There’s no definitive answer to this. But based on estimates it made in 2022, the Office for Budget Responsibility (OBR) calculates that by 2026-27, fuel duty receipts will be £1.4bn lower than they are at present.
In its estimates, the OBR acknowledges the likely existence of the ZEV mandate, which is due to go live in January 2024 and which, by 2026, will require 33% of a manufacturer’s newly registered vehicles to be EVs, rising to 38% the following year and 80% in 2030, when only EVs and hybrids can be sold in the UK.
Concerned about the decline in the £35bn annual revenue generated by both fuel duty and vehicle excise duty, which won’t be charged on EVs until April 2025, the House of Commons Transport Committee urged the Treasury and Department for Transport in February 2022 to consider proposals for maintaining tax revenues.
Stressing that the “situation is urgent”, its main proposal was to replace both duties with a road pricing mechanism that uses telematic technology to charge drivers according to distance driven.
In February this year, following a series of occasionally testy exchanges during which it was criticised for its lack of engagement with the topic, the Treasury wrote to the committee emphasising that reducing the cost of living was its priority, highlighting how it had extended the temporary 12-month cut in fuel duty of 5p per litre until April 2024 as evidence.
At the same time, it reminded the committee that EVs will attract car tax from April 2025. However, as in previous correspondence, it made no comment about the future of fuel duty or road pricing.
In response to an enquiry by Autocar, a spokesman said: “We are making sure that motoring tax revenues keep pace with the switch to electric vehicles, whilst keeping it affordable for consumers, and have no plans to introduce road pricing.
With the EV transition accelerating, it’s right that all drivers start to make a fair tax contribution through changes to vehicle excise duty.”
Pay-per-mile road charging alternatives
The Treasury’s, and by extension the government’s, unwillingness to engage with the debate around the future of fuel duty is prompting others to propose their own solutions.
In May, in a document called ‘The future of driving’, the Centre for Policy Studies think tank suggested a ‘pay as you drive’ scheme for zero-emission vehicles.
ZEVs would be charged a flat rate for every mile driven but still pay significantly less than their petrol and diesel counterparts, it said. While everyone would be allocated a set number of tax-free miles a year, the allocation would be higher for those living in remote areas with fewer transport alternatives.
Eventually, as the share of ZEVs on the roads grows, this new per-mile charging system could completely replace fuel duty and vehicle excise duty for all vehicles, the Centre for Policy Studies suggested.
Mileage data would be gathered by a variety of means including being submitted manually, by an on-board device transmitting it or by GPS tracking of the vehicle.
The RAC said its research found that drivers supported the principle of ‘the more you drive, the more tax you should pay’ but were concerned the government might use such a system to increase the amount they are taxed.
Simon Williams, RAC head of policy, said: “There are so many unanswered questions. Fuel duty could simply increase to encourage the transition to EVs but when would be the best time to do it? The pence-per-mile solution sounds best but how would it be applied – at MOT time, in which case cars less than three years old would avoid it?
“Using cameras to monitor every road, large and small, would be very expensive – and look how ULEZ cameras have been vandalised in London. Whatever the solution, it must be a common-sense one and revenue-neutral.”