A tax trap is closing in on the UK government as the rising efficiency of today’s new cars threatens to starve the Treasury of tax revenue, according to analysts at CAP Automotive.
Exclusive analysis by CAP reveals that today’s most popular cars would have delivered 18% less fuel duty and VAT and a massive 58% less in Vehicle Excise Duty (VED – known as annual ‘road tax’) revenues over the past three years than the equivalent models that were registered in 2009.
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It means the Treasury is falling into a tax trap and motorists should pay careful attention to the Chancellor’s Autumn Statement on December 5 to see if he has found a way to reverse the decline, CAP warns.
The tax revenue issue stems from the success of vehicle manufacturers in reducing engine CO2 emissions and improving fuel consumption.
CAP says the reduction in revenue runs into hundreds of millions of pounds.
Mark Norman, of CAP Automotive Intelligence Services – which advises major organisations on automotive business strategy – said: “Innovations in engine design together with the government’s reliance on CO2 emissions as a basis on which to tax vehicles have led to this problem because cars are now using substantially less fuel and emitting less CO2.
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By GlobalData“Our analysis shows the scale of the emerging problem and the question now is not whether the Chancellor will act to stem this flow of revenues, but how. Maybe we will learn that, when he makes his Autumn Statement on December 5.
“The only realistic areas he can look at to fully address the problem are; taxing the fuel, taxing the car and taxing road use. However, taxing fuel is partially self-defeating because motorists tend to respond by using less, as we have seen over the past couple of years. Taxing the roads is a political nightmare and there is no reason to think politicians are ready to grasp that nettle.
“There is, of course, already a tax on car ownership called VED but the problem is that by encouraging the take-up of more ‘environmentally friendly’ cars the average VED paid will collapse, as our analysis has shown.
“A more sensible option, perhaps, is that the Chancellor counters the problem of dwindling VED revenues by use of a one-off ‘showroom tax’ to influence take-up of greener new cars and then work towards a more uniform VED rate for all cars after that.
“This would be unpopular among those who have already bought specific cars because they attract low-to-zero VED rates. However, if VED is going to continue to be a large revenue earner then something will need to be done.
“There is also a real emerging issue around the current VED rates on cars with high CO2, which will increasingly mean that perfectly good used cars will eventually end up being scrapped purely because they are expensive to tax, a trend which is neither sensible nor environmentally friendly.
“Clearly the whole issue is a minefield and the only certainty is that whatever option the Chancellor chooses will be fraught with difficulties and ultimately prove unpopular with motorists.”
