Will the Chancellor bring in an EV mileage tax?

Just as I was satisfied that I’d narrowed down the main areas that Rachel Reeves is likely to target for tax rises to fill her ever-widening black hole, out of left field, a new contender has stepped forward in the shape of EVs (Electric Vehicles).

This newcomer in the field for an area of tax that won’t break Dear Rachel’s untouchable holy trinity of Income Tax, NIC & VAT, has come about as a result of a verbal slip by the Chief Secretary to the Treasury, James Murray. Poor old James, who thought his mike was switched off during an interview, admitted that his boss was seriously planning to introduce a 3p per mile charge on EV’s and plug-in hybrid cars.

EV’s have had an easy ride

EV’s have been the accountant’s favourite for many years as they attract so many tax breaks including 100% capital allowances, salary sacrifice, low taxable benefits, free charging at work and, until recently, zero road tax (VED), but the greatest benefit to EV drivers is that they don’t pay fuel duty on the power required to drive their vehicles.

Most EV’s are only charged VAT on the electricity consumed at 5%, as the charging usually is done at home. It only rises to 20%, if a commercial charging point is used, say at a motorway service area. The VAT paid on the electricity used does not remotely make up for the lack of fuel duty, which in total raises £25bn per year, representing just over 2% of all tax receipts.

Every successive government, since EV’s fist hit our streets, have added to this lack of revenue problem by using tax incentives to encourage people to switch to EVs, which now account for 25% of total new vehicle sales. This figure rises to just over 50 % If you include hybrids.

The mileage tax thinking

James Murray’s inadvertent verbal slip revealed that the Chancellor is thinking of plugging some of her blackhole with a new mileage tax for EVs to take effect within two years, which is estimated will raise at least £2bn annually, in addition to the annual vehicle excise duty (VED). Drivers of hybrid vehicles will probably pay a lower per mile rate to reflect the fact that they also pay some fuel duty.

Right now, we don’t know exactly how the tax will work, but it is clear that it won’t involve the ubiquitous roadside cameras, as it would be hugely expensive to install them to cover every road in the country. The EV tax is most likely to be based on an estimated annual mileage charge, adjusted at the end of the year.

Another job for HMRC?

It is unlikely that HMRC will be directly involved in administering a new EV tax, with the DVLA being the most likely candidate, as they already handle vehicle registrations and collect the VED. It would therefore make sense for the new mileage tax to be added onto the VED mechanism, as the DVLA already checks if a vehicle has a valid MOT and insurance at the date the VED is payable.

So, it will not be much of a leap to extract the mileage report from each MOT certificate, which currently applies to vehicles three years old and which could easily be changed to an annual MOT for EVs or possibly for all vehicles.

Further political damage?

The beauty of fuel duty is that it is hidden in the price of petrol or diesel, so most drivers are not aware of the tax at the point of payment. A new mileage tax for EV drivers will create millions of disgruntled voters who would grumble that they see no benefits from paying more road tax, unless perhaps it was spent on sorting out the increasing proliferation of potholes on our roads.

Dear Rachel could however sweeten the pill by providing many more EV charging points with perhaps VAT being charged at the lower 5% rate of VAT, the same as their home charging. She will also be acutely aware that as the percentage of EV’s on our roads continues to rise, the £25bn currently collected on fuel duty from drivers of petrol and diesel cars will gradually fall.

In the short term she could shore up the tax take by increasing fuel duty (57.95p per litre), which has been frozen since 2011, plus a temporary cut of 5p per litre introduced in March 2022, due to high fuel prices following Russia’s invasion of Ukraine. So, if nothing else, it is likely that the temporary 5p cut will go.

When asked about the mileage tax rumour James Murray said, “Fuel duty only covers petrol and diesel, but there’s no equivalent for electric vehicles. We want a fairer system for all drivers while backing the transition to electric vehicles.”

The transition to EVs is critical to the Government meeting its Net Zero targets, and once sales of new petrol and diesel cars are banned (sometime in the 2030s), the billions lost in fuel duty will be a huge issue for the Treasury’s bean counters, with Dear Rachel or her successor, faced with a major Catch 22 question.

Accountant’s view

I have no idea exactly what Dear Rachel will do come Budget Day, but as there has been growing concerns about the emerging “tax gap” from more and more petrol and diesel cars coming off the roads, I am fairly certain that some kind of tax on EV road use will be announced, perhaps after a consultation paper.