We look at the ways in which VED – or car tax – will be applied to EVs in the future

There are numerous benefits to buying and running an EV. Aside from the driving experience and environmental benefits, they’re much cheaper to run than a petrol or diesel car. Zero tax is one of the reasons for this, but with EVs set to overtake ICE in a few years’ time, the government needs to fill a hole in its budget.

To cut a long and complex story short, at some point a charge will inevitably be introduced that applies to EVs and replaces the existing tailpipe emissions-based VED bands, which sees EVs charged £0. This applies at purchase, too, where the £310 supplementary charge for five years on cars over £40,000 isn’t applied.  

According to the RAC foundation, the first year alone that an EV is on the road, it costs the treasury £1000 on average. For a petrol car, excise and VAT amounts to almost £600 on average, then there’s the average of £305 in so-called showroom tax. Diesel hits the government’s coffers even harder, with £800 in fuel duty and £338 in so-called showroom tax swiped from the government’s bottom line when a buyer switches to electric.  

To put the loss in fuel duty alone into perspective, around 50 per cent of the cost of petrol or diesel is straight-up duty. When you add up the amount of fuel we use it’s a huge sum – around £30 billion according to a report by the government on the Net Zero 2050 ambition. To give that some perspective, it would cover most of the UK’s yearly defence budget. Around £6.5bn will be lost each year from VED – or ‘road tax’ as it is commonly (albeit incorrectly) called.  

Within the report, there is a small but important mention of the realisation that tax is inevitable: “Over time the government will need to consider how to offset these lost tax revenues – whether through adjustments to other taxes or reductions in government spending – so that the UK can reach net zero while maintaining the long-term health of the public finances.” 

Despite this, and while we’re setting out the background to the issues the treasury is facing, aiming for Net Zero 2050 is almost certainly going to be of neutral impact, or even slightly beneficial to the economy. “Overall, in the context of the rest of the world decarbonising, the net impact of the transition on growth to 2050 is likely to be small compared to total growth over that period. 

“It could be slightly positive or slightly negative.” 

What the report does recognise is that whatever the economic impact, it is no longer an option to choose not to decarbonise.  

How could EVs be taxed in future?

At the moment, financial incentives mean that to an extent, the government is paying part of the cost to go electric. Given that in doing so the treasury loses out on revenue, it would seem like cutting one’s nose off to spite one’s face, however, in this instance the greater good is far more important than the money. What is accepted is that tax is a necessity.  

Nicholas Lyes, RAC head of roads policy, said: “While not paying car tax is clearly an incentive to go fully electric at the moment, we will very soon need a system that can levy tax on both conventionally fuelled and battery electric vehicles fairly. If this isn’t addressed, we risk finding ourselves in a situation where petrol and diesel drivers continue to pay all the tax for using the roads which is unsustainable.” 

The current model of VED based on emissions, and collecting revenue from fuel, works so well because it directly penalises people for driving more or driving a more polluting car. It’s not quite pay-per-mile, but fuel duty adds a certain level of road charging into the equation.  

An obvious solution to mirror the current situation with EVs would be to chuck a surcharge onto the electricity used to charge an EV. But there’s a problem here: smart grids would be required to differentiate between electricity that is going into an EV and electricity that is going into someone’s cooker.  

Lumping money onto domestic electricity – penalising people for making a chicken biryani for dinner – would be political suicide. Furthermore, from a purely economic point of view, someone who has invested wisely in solar and a home energy storage system would quite legitimately avoid much of any additional levy for charging an EV at home (and the same could apply to workplaces, too). It would be almost impossible, and moreover immoral, to charge people for generating clean energy at home.  

The most sensible and workable solution, and one which 40 per cent of drivers surveyed by the RAC reckon is fairer than the current system, is pay-per-mile – aka road pricing. It mirrors the current system of fuel duty by making people pay for what they ‘use’, and incentivising driving less or using other means of making journeys such as public transport or cycling. Or simply being more intelligent about what journeys need to be made in the first place.  

Despite the RAC’s survey results, road pricing has been wildly unpopular – politically – since it was touted under Tony Blair in 2005. David Cameron revisited it in 2011 but quickly dropped the idea of what has been referred to as ‘a poll tax on wheels’. Which it isn’t given that driving isn’t a fundamental right, but it makes a good headline, nonetheless. 

The ways in which this could be implemented are two-fold, and both are tried and tested. The first is via tolls such as that on the M6 Toll Road and seen in mainland Europe and the USA. Tolls could be applied at certain times and at certain rates to account for traffic conditions and ensure that those who are part of congestion issues pay for the privilege.  

The second is via GPS (or black box) tracking. All new EVs (in fact, all new cars) have the technology built in, and older cars can be retrofitted very easily. Many insurers are already modelling certain policies on black box and pay-per-mile technology, and people are willingly buying into it to be rewarded for using their cars less. This could also be used for the implementation of toll roads, killing two birds with one stone.  

However, this is unpopular here in the UK with 47 per cent of drivers having ‘some concerns that they are being watched while driving’ and 14 per cent believing that ‘insurers will access data that could be used against them’ according to research by Compare the Market a couple of years ago. A way of getting around this could be to charge EV owners on a yearly basis via MoT data, or for newer cars, a mandatory mileage check-in.  

One idea which was mooted by Edmund King of the AA was giving drivers a ‘free’ 3000 miles per year, with charges only coming in on top of this figure. Rural dwellers would also get a larger number of free miles given the necessity for them to drive further for basic needs, such as shopping.  

How will it pan out?

At the moment, the simple answer is that we just don’t know. Government hasn’t made any significant steps to address the issue, and until the shift to EVs grows to the extent that it has a more tangible impact on the treasury’s income, it’ll remain a political hot potato.  

If we were to make a bet, some form of road pricing will be on the policy table at the very least by 2025. 

What is known is that for all the benefits of having an EV from an environmental point of view, at some point it will start costing more to own, charge and drive one. To that end, the time to make the most of the available savings is now.  

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