In the Budget on 30th October, the Chancellor announced that fuel duty would be frozen for the 15th consecutive year and that the ‘temporary’ 5p cut, will also be extended for a further 12 months. This would appear to be somewhat counterintuitive, when stated government policy favours a switch to electric cars or EV’s.
The fuel duty freeze was one of the most surprising announcements in the recent Budget, despite strong rumours to the contrary, it now appears that fuel duty will not be increased anytime soon, but existing tax incentives to buy an electric car will continue. So, what does this mean for the future of fuel duty and car taxation in general?
Fuel Duty Explained
Fuel duty is a significant source of revenue for the government and in the 2023-24 tax year, raised £25 billion, around 2½% of all tax receipts, which equates to roughly £850 per household. Additionally, VAT is then applied at the point of sale, so the tax take is even higher.
The headline fuel duty rate for standard petrol and diesel is 53 pence per litre and this has remained frozen since 2011/12, with this figure also reflecting a temporary 5p cut brought in to assist businesses and individuals, post pandemic. All businesses and everyone who owns a car have welcomed this news, but it does mean that the government is foregoing at least £3bn of additional tax revenues.
Electric vehicles given a boost
The Chancellor also announced a renewed commitment to electric vehicle incentives. According to the Budget ‘red book’, there are now more than one million electric cars on our roads, with the government remaining committed to phasing out new cars that rely solely on internal combustion engines by 2030.
The changes the Chancellor did and didn’t make will undoubtedly be picked apart in the coming months, but in brief Ms Reeves committed £200m of additional funding for local authorities to install on-street charging points and £120m in grants to support the purchase of electric vans and the manufacture of wheelchair accessible electric vehicles.
How will the Chancellor close the tax gap?
The Chancellor confirmed that from April 2025, whilst electric cars will be subject to vehicle excise duty, there would not be any changes to the beneficial company car regime, nor the 100% first year allowances for electric cars and charging points. If these measures do what they are intended to, we can expect to see fewer petrol and diesel cars on our roads in the coming years.
Based on the assumption that increasing numbers of drivers will make the switch to electric, fuel duty revenues will plummet by 2030. As fuel duty currently represents a significant percentage of the tax take, the gradual drop-off in revenue over the next six years has the potential to cause the government a major fiscal headache!
We therefore need to start thinking now about how we are going to replace fuel duty revenues, which will be necessary in a world, where petrol/diesel sales are a dwindling fraction of what they are today. The main options currently being actively discussed in the Treasury, are:
- EXCISE DUTY: significantly increasing vehicle excise duty on electric vehicles. At present EV’s pay nothing, but from 1st April 2025, drivers of EV’s will pay vehicle tax in the same way as drivers of petrol and diesel vehicles, with the change applying to both new and existing vehicles. It will, therefore, be very easy to increase the rate in future.
- ROAD PRICING: This is already being done on a number of roads such as the M6 Toll , the M25 – Dartford River Crossing and the M48 – Severn Bridge. Additionally, a number of UK cities have congestion charging. Road pricing could therefore easily be extended to all major trunk roads and motorways using number-plate recognition technology (NRT).
- MILEAGE CHARGE: This is arguably the fairest method, based on the argument that the biggest users would pay the most. The problem, however, is that it would be a practical impossibility to extend NRT to local and rural roads, with the only realistic solution being to fit each car with a ‘black box’ which would be hugely unpopular with the general public.
All three of the potential solutions to replacing the lost fuel duty, will be seen by the general public as specifically targeting electric vehicles. Also, whichever solution is chosen, this will be perceived as going against the government’s wider green agenda and their stated direction of travel. So, unless the team at the Treasury can come up with a different ‘cunning plan’ road pricing or mileage pricing, would appear to be the obvious choices to replace the lost income.
All three choices will need careful consideration around their scope, such as which roads and types of vehicle will be covered by a pricing charge. Additionally, what if any exemptions will be built in? There are of course other issues, such as deliverability, especially in relation to mileage pricing as most drivers would view a ‘black box’ as the government spying on them.
It remains to be seen how brave the government will be in this respect, but one thing is certain, the current status quo cannot be maintained for much longer.
Accountant’s view
Given that Rachel Reeves will need to raise additional taxes in the coming years, especially to fund her plan to boost the economy by major infrastructure investments, it is blindingly obvious that she cannot easily replace a £25 billion + black hole in her tax revenues, by not taxing motorists.
The $64,000 dollar question is, how will she do it?
