The UK Government's annual Budget Statement today includes provision for significant reform to Vehicle Excise Duty (VED; an annual charge also known as 'road tax') paid by UK car owners to take effect in 2009. The reform is designed to 'strengthen the environmental incentive to develop and purchase fuel-efficient cars'.

The Government said that 'the technology exists to reduce the average carbon dioxide emission of new cars to 100g per km by 2020'.

Dealer body the RMI National Franchised Dealers Association (NFDA) was quick to criticise the proposals.

Director Sue Robinson said: "The Chancellor is attempting to encourage the motorist to move to lower emitting cars with the increase in Vehicle Excise Duty (VED) for large vehicles, He asserts that the reclassification of vehicles into six new VED bands will force motorists to choose lower emitting vehicles, but the inducements are so small, that the effects are likely to be equally small.

"There are more effective ways to influence the buying habits of motorists than the 'blunt instrument' approach of a road tax increase.

"It will be those who really need larger vehicles for their daily lives that suffer most.  Families, rural dwellers, farmers, and business users are less able to absorb this increase, as they are already paying extra to use their vehicles through fuel duty, company car tax, and other measures.

"Instead of punishing motorists for choosing what is available, the Government needs to do more to assist vehicle manufacturers to develop cleaner vehicles. Consumers need to be given a proper choice, and manufacturers and vehicle dealers need to be able to give it to them."

From 2009, VED will be restructured with new bands, based on carbon dioxide so that people gain financially by choosing the car with the best environmental performance in a given group. The financial difference between the most and least polluting cars will increase, so that making a small change in car emissions has a greater financial impact.

From 2010, there will be a new higher first-year rate based on carbon dioxide emissions, to influence purchasing choices.

Specific changes include:

  • six new VED bands from 2009-10 - including a new top band (band M) for the most polluting cars that emit more than 255g CO2 per km;
  • reducing the standard rate of VED, in 2009-10, for all new and existing cars that emit 150g of CO2 per km or less, and increasing the standard rate of VED on the most polluting cars to £425;
  • from 2010-11, extending the zero rate of VED, during the first year of ownership, to all new cars that emit 130g CO2 per km or less - the EU proposed target for average new car emissions in 2012;
  • holding the first-year rate for all new cars that emit between 131 and 160g CO2 per km equal to the standard rate in 2010-11;
  • introducing for the most polluting cars a first-year rate of £950 in 2010-11;
  • and providing a £15 or £20 discount for alternatively fuelled cars in 2009-10, and £10 in 2010-11; and aligning the alternative fuel and standard rates of VED in 2011.

There were also changes to the treatment of company cars announced:

  • replacing the existing capital allowance treatment for business cars with an emissions-based approach. Cars will be placed in one of two capital allowance pools according to their CO2 emissions, with cars whose emissions are above 160g per km receiving a lower allowance. 100 per cent first-year allowances will continue to be available for cars with CO2 emissions not exceeding 110g per km;
  • increasing company car tax rates on all but the cleanest cars emitting less than 135g CO2 per km in 2010-11;
  • enhancing the incentives to drive fewer miles through changes to the fuel benefit charge from April 2009;
  • offering a lower VED rate for diesel vans that comply with EU airquality emission standards; and
  • maintaining tax-free mileage allowances (AMAPs) rates and thresholds at current levels.

The Budget Statement confirmed that main road fuel duty rates will rise by 1.84 pence per litre on 1 April 2009, and that rates will then also increase by 0.5 pence per litre above
indexation on 1 April 2010.

By 2010-11, main fuel duty rates will remain at least 11 per cent lower in real terms than they were in 1999.

However, the Budget Statement also announced that the planned fuel duty increase of 2 pence per litre in April 2008 will be deferred until 1 October 2008 (a concession made due to currently high oil prices).

Reactions

The Society of Manufacturers and Traders said sales taxes on higher emitting cars have little effect on CO2 emissions and create an unwelcome market distortion. Buyers of new cars with CO2 above 160g/km will have to pay a supplement to VED on first purchase from 2009.

For cars emitting more than 255g/km CO2 this rises to £950 (£455 of which is VED)

"Since the introduction of CO2-based road tax in 2001, there has been a clear trend towards lower-CO2 new cars," said SMMT chief executive Paul Everitt. "Encouraging even more buyers to choose models with class-leading emissions should be the priority. We are therefore pleased to see an increase in the number of bands to 13 from 2009.

"However, introducing what is effectively a sales tax for many new cars is a retrograde step. Trying to force people out of high-value cars has no environmental merit and will be seen as a smokescreen for revenue-raising."

A spokesman for Ford said that the company had vehicles, such as the Focus 1.6TDCi, which come in under the 130g/km but believed people would still be driven to buy the cars they need to use, particularly those with large families.

At the very top end of the so-called 'gas-guzzling, high polluting scale' manufacturers of expensive vehicles such as Bentley and Maserati, said that their customers would be unlikely to be affected by one-off increases in tax.

AA president Edmund King said the Chancellor had made a sensible decision in delaying the introduction of a 2p rise in fuel prices.
"This temporary relief should quell any panic at the pumps," he said.

"Two pence might not sound like much but when it is added to the 20p-a-litre increase in pump prices in the last year it could have been the last straw for many motorists and hauliers.

"If fuel prices remain at records levels in the autumn the increase should be scrapped."

British Chambers of Commerce director general David Frost said the government should have gone further and scrapped the planned rise completely.

"There is no justification for a 2p rise in October," said Mr Frost.

Frost said higher oil prices meant the government was already benefiting from increased duty receipts.

The RAC Foundation also welcomed the decision to delay the 2p fuel duty increase as "the only bright spot in a budget that seemingly does nothing positive for the motorist."

Welcoming the fact that the beleaguered British motorist has been given a short breathing space, Sheila Rainger, Acting Director of the Foundation said: "This sensible decision is the only bright spot in a budget seemingly doing nothing positive for the motorist. But postponing the increase only delays the misery for British motorists struggling to make ends meet. The Chancellor should look again at the idea of a fuel duty stabiliser to protect British motorists from the shocks of the global oil market."

The cost of fuel has leapt 20% in the last 12 months as the global oil price rises to over $100 per barrel - and any increases in duty would disproportionately affect motorists on low incomes and those in rural areas who are dependent on their cars.

The Foundation believes the motorist should no longer be expected to top up the 'public purse' with taxes disguised as environmental considerations, now that the Stern Review has demonstrated that motorists are the only energy users meeting their carbon costs.

"There is no environmental case for higher taxes. Based on the Government's own figures in the Stern Review, the full cost of the greenhouse gases produced by road transport amounts to no more than 14p per litre. Road users are the only energy users paying the full cost of their carbon emissions; unlike rail or air travellers."

The Foundation is disappointed there has been no provision for additional spending on improving the UK's road network considering that both the budget and The Eddington Transport Study have recognised the importance of reducing congestion to develop and maintain the economy.

On the subject of new tax proposals, Rainger said: "Graduated VED has helped consumers choose the most efficient car to meet their needs. As long as new bands inform and do not confuse the customer they will be welcome. The impact of new bands on buying behaviour should be carefully monitored and the thresholds adjusted if necessary."

Commenting on the first year tax changes, Rainger pointed out: "Measures that make people think carefully about choosing a vehicle that matches their needs are always welcome. However, we believe incentives for choosing a more efficient car are more likely to win the public over than swingeing taxes. The Government should monitor the effectiveness of this tax and be prepared to drop it if it is not working."

This is what the Chancellor said on reforms to the road tax to help boost sales of low-emission cars:

"Britain's 30 million cars, vans and lorries together account for 22 per cent of total carbon emissions.

"Over the last 20 years new cars have become 50 per cent more efficient. And new technology will bring further improvement.

"Today, I am publishing Professor Julia King's review of low carbon cars in which she examined new technologies which could help cut carbon emission.

"Professor King found that by simply switching to the cleanest cars on offer, motorists could save 25 per cent of their fuel costs.

"She also found that manufacturers needed to be encouraged to bring new technology to the market.

"And I am asking the European Commission today to set a tighter target which reduces the cap on emissions from cars from 130 grams per kilometre of carbon dioxide to 100 grams per kilometre of carbon dioxide by 2020.

"The road tax system should do more to support the use of more carbon-efficient, and therefore less costly cars.

"This will help reduce average carbon dioxide levels in new cars.

"Firstly, from April 2009, I am proposing a major reform to Vehicle Excise Duty to encourage manufacturers to produce cleaner cars and by introducing new bands, there will be an incentive to encourage drivers to choose the least polluting car.

"And as a second stage for new cars, from April 2010 there will be a new first-year rate based on carbon dioxide emissions of the car.
"Cars that emit less than the proposed 130 grams per kilometre European standard of carbon dioxide emissions will pay no car tax at all in the first year.

"But a higher first year rate will be introduced on the most polluting cars.

"Cutting taxes for those who cut carbon emissions.

"But it is right that if people choose to buy a more polluting car that they should pay more in the first year to reflect the environmental cost.
"The changes will provide a real incentive to manufacturers and motorists.

"We must encourage sustainable biofuels. Therefore the biofuel duty differential will be replaced by the Renewable Transport Fuel Obligation.
"I am also reforming capital allowances for business cars to increase the incentive to move to lower emitting cars."

And this is what Darling said on road pricing:

"We are spending more on public transport. But we also need to reduce congestion and improve transport links.

"If we are to remain competitive over the next 20 to 30 years, we have to take more radical steps to reduce congestion on our roads.

"We need more capacity on our roads but we cannot build our way out of all the problems we face.

"Last week the Secretary of State for Transport announced further measures to ease congestion. In addition she has made available funding to develop local schemes to tackle congestion in the short-term.

"In the longer-term, road pricing could reduce congestion as well as helping to meet our wider environmental obligations.

"So I am setting aside new funding to develop the technology that could underpin national road pricing, inviting tenders to test this with the results expected next year."

Professor Julia King, Vice-Chancellor of Aston University and former Director of Advanced Engineering at Rolls-Royce, working with Lord Nicholas Stern, has undertaken an independent review to examine the vehicle and fuel technologies which over the next 25 years could help to decarbonise road transport, particularly cars. The final report of the Review, The King Review Part II: recommendations for action, was published to coincide with the Budget.