Pressure is mounting on the government to give the UK motoring tax system a refit. In early January, James Browne, Head of Work, Income and Inequality Analysis at the Tony Blair Institute for Global Change (TBI), called on Chancellor Jeremy Hunt to act urgently on the issue.

According to latest figures, fuel duty revenue for the 2022/23 period stood at £25.1bn. But a forecast from the Office for Budget Responsibility suggests that it could fall away completely amid growing use of electric vehicles (EVs) in line with the government’s planned transition to net zero by 2050.

With that duty fading as a revenue source, Browne said, the government must set out a plan for moving towards per-mile road pricing as soon as possible.

Quality of life

TBI first set out its views on motoring tax in its 2021 report Avoiding Gridlock Britain. As well as highlighting the fiscal black hole created by falling fuel duty receipts, it warned of a likely rise in congestion as EV usage grows.

Since 1990, the UK has already seen a 40% increase in road miles travelled, the report says. At the time it was published, the number of EVs on UK roads was around 100,000. But it could hit as many as 10m by 2030 – and 25m by 2035, according to figures cited in the TBI report.

“With a collapse in the marginal cost of driving we can expect the amount of time we waste in traffic to rise by up to 50%, with huge costs to quality of life and the economy,” the report says.

Another think tank paying close attention to this subject is the Resolution Foundation. Published in June last year, its report Where the Rubber Hits the Road: Reforming Vehicle Taxes calls for a national, per-mile road duty of 6p (plus VAT) for typical electric cars, to be uprated in line with inflation. It also recommends a tax by weight: £7.50 per kg for cars above 1,600kg, or £14 per kg for those above 1,800kg.

Tax erosion

Resolution Foundation Senior Economist and report co-author Jonathan Marshall says the transition to a new-look motoring tax must strike a careful balance between two main factors: “We have the problem that one of the UK’s main tax bases is eroding. But there’s also a distributional issue. Under the current system, it’s possible to remove oneself from fuel duty by buying an electric car. But that option isn’t available to everyone, because EVs are quite expensive.

“So, if you focus purely on the tax erosion – ‘This is happening too quickly’ – you may end up with something that makes the tax system more aggressive. But if you make a point of targeting those who are buying electric cars, you may slow the shift to EVs, which is also not ideal. How government policy balances those factors will shape the transition.”

The Resolution Foundation recommends that the weight levy should replace Vehicle Excise Duty, which Marshall describes as being “on life support”. He believes this would be an effective way to prompt behavioural change: “Driving around in a big car is no doubt something that those drivers enjoy, but that puts costs on other people. For example, around safety, and the amount of space that larger vehicles take up – especially in urban areas.”

Also, Marshall argues, if a large share of EVs are bulky SUV models that gobble up more energy than other cars, that will push up vehicle-energy bills for everyone. To reduce the appeal of those types of vehicles, the Resolution Foundation would like to see a weight tax applied in annual charging, which Marshall believes would influence behaviours more than an upfront charge.

Changing gear

From an HMRC standpoint, new technologies could make the shift from one source of revenue to another relatively seamless. “HMRC famously likes fuel duty,” Marshall says. “It’s taxed at refinery level, so it’s recouped from only around a dozen places. That makes it quite easy for HMRC to keep an eye on how much fuel is sold and burned. But there’s no reason why a similarly easy process couldn’t be found for a future road duty system.”

Marshall notes that, as a result of recent regulations, every new car is hardwired with GPS – often with the scope for a built-in speed limiter. Such features, he says, are “not a million miles away” from the type of technology that would be required to monitor mileage and enable road duty.

“In theory, that revenue could also be aggregated outside HMRC and presented to the government in big chunks. Some have suggested that car manufacturers could do this. Others say insurers. Either way, a company with millions of vehicles on its books would collect the financial data and funnel it along to the government.”

Like TBI’s Browne, Marshall wants the transition to happen sooner rather than later. “It’s vital to do something before the status quo becomes too entrenched. It’s tougher to tell the public you’re going to put a tax on EVs if they’ve been driving around in them for years and years. If we get to the point where, say, 10% to 30% of the nation’s vehicle stock in active use is electric, and then say to those drivers, ‘OK – now we’re going to tax you,’ that’s a much harder sell than starting early.”

Ed Saltmarsh, VAT and Customs Manager in ICAEW’s Tax Faculty, agrees that something must change: “The UK’s current motoring taxes have served us well for a long time, but they are no longer fit for purpose and are becoming less appropriate each year. The government must ensure it takes a holistic approach to reforming motoring taxes to ensure they are simple, provide a sustainable revenue stream, and are compatible with its net-zero goals.”