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But, what about the taxman? What does he think of EVs

Posted by Roseanne: Jul 12, 2018 4 min read

Our Head of Insights, James Mckemey, investigates the debate around vehicle tax and the mass adoption of electric vehicles.

A common concern about the move towards electric vehicles is how we will finance our public services without the significant fillip that comes from vehicle taxation.

Let’s take a look at the main taxes paid on our cars:

Vehicle Excise Duty (VED) or “Road Tax”

VED contributed £6.1bn in 2014-15.

This is the one that drivers like to remind cyclists and horse riders that they pay. Of course, it’s not really a tax used for building and maintaining the roads, at least it hasn’t been since 1937, it’s just a tax that heads back to the treasury in the general taxation pot.

Yes, many EVs are currently exempt, because it is scaled with how polluting a vehicle is, but already those >£40k list price are not. And, if you believe that VED will not one day be applied to all EVs at a similar level today, I fear you may be somewhat naive.

What does this mean?

  1. There will be no loss from VED revenues to HMT, at least while car ownership/leasing remains prevalent

  2. Do you want the VED savings? Join the EV revolution ASAP!

Fuel Duty

Fuel Duty contributed £27.2bn in 2014-15.

This is the big one. Contributing 3.7% of total govt expenditure in 2014-15, and a higher 5.2% of total tax yield (the deficit being as it was).

Fuel duty is considered quite an ethical tax, incident on polluting activity. It has generally crept up annually (recent political decisions excepted), the tax burden working as an incentive on manufacturers to make more fuel-efficient cars, an incentive for consumers to take alternative transport options and provides revenue that pays for all that stuff we want governments to pay for.

But EV drivers do not contribute here. Which in the first instance is great. They are taking a transport choice that is much less harmful than petrol/diesel powered transport. But in the fullness of time this may represent a challenge.

What does this mean?

  1. There will be a hole in tax revenue.

  2. The govt will have to come up with a way to cover the lost contributions.

The duty to look beyond fuel duty - alternatives

Whack “fuel duty” equivalent on electricity

We already pay VAT on electricity, but the problem is where it goes is hard to monitor. How can you tell whether the energy recorded through the meter is making toast or stored EV miles? There may be some applications where taxing charging of cars specifically makes sense (potentially on high powered rapid charging fees?), but the challenge of identification likely means it won’t be at a scale to match the fuel duty loss.

Pay per mile driven, or “road pricing”

This concept has been around for some time, but fuel duty taxation has been easier to raise and manage until now. But, if all our miles become “zero emission”, while our technology to record people’s mileage data accurately ever improves, then “road pricing” may well become the answer - and in your Scribe’s engagement with govt types, it seems to be the leading option. Of course, rather than tax all roads equally, there would likely be a progressive approach to this to incentivise drivers away from the busiest roads and/or peak hours, thus disincentivising congestion.

So let’s run some numbers and see how burdensome this approach would be. For argument’s sake, we will assume the tax is spread evenly over miles driven:

  • Total U.K. miles driven = 323.7 billion

  • Total fuel duty revenue = £27.2 billion

  • Equivalent if paid per mile = 8.4p per mile

Okay, you’d rather not pay it, but it’s not quite as draconian as many fear.

But, if we clean our air, do we need to raise so much tax?

According to World Health Organisation figures, air pollution costs the UK economy a staggering £54 billion per year. Now macro-economic calculations of this kind are far from your Scribe’s forte, he’ll leave that to the economists. But any proportion of those savings that are incident on the required tax yield would directly reduce that 8.4p per mile figure further.

Final thought

Though EV sceptics try and throw this subject up as a blocker to electrification, I really would not worry about this problem. Not only are there paths to solve it, but of all the things that you ever need worry about, government's ability to find things to tax is most certainly not one of them.

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