Reports suggest Rachel Reeves and her officials are giving serious consideration to a “pay per mile” system of tax on battery electric vehicles (BEVs).
The idea has already been described by the AA as a “poll tax on wheels” and does not, at first glance, seem entirely consistent with the push for net zero and electrification of our vehicles. In reality, as with so many other of her difficult choices on tax, Reeves probably has no alternative but to press on…
Why this new tax?
To raise revenue at an unusually difficult time for the public finances. A particular issue with existing fuel duty on petrol and diesel is that it raises less and less as motorists turn to BEVs and hybrid electric vehicles (HEV/PHEVs). Increasing the rate of fuel duty has proved politically difficult and, in any case, couldn’t be done on a scale that would fully compensate for the switch from internal combustion engines. Besides, fuel duty is only tenuously related to ability to pay; options for a more equitable system have been explored since at least the time of the previous Labour government.
Fuel duty still raises some £25bn a year but, if the targets to phase out petrol vehicles, diesels and hybrids are maintained, this figure will rapidly fall through the 2030s and 2040s.
How will it work?
Drivers of BEVs would be charged 3p per mile travelled, adding around £250 a year to costs for the average private motorist. A journey from Leicester to London, roughly 100 miles, will cost £3; and from Edinburgh to Bristol about £12.
A complicated “snooping” digital system to track vehicle usage, mooted as far back as 2007, has been rejected and HMRC will instead ask drivers to estimate their average mileage for the coming year (as some insurers already do). Who checks the mileage isn’t clear, though DVLA records will cover cars more than three years old. It seems to depend on taxpayers being honest and the difficulty of “clocking” modern cars.
When is it coming in?
It is suggested as starting in 2028, after the usual period of consultation. It’s not clear how commercial users, such as van drivers and haulage companies, will be treated; the phase-out of fossil fuels for larger commercial vehicles is much further away.
Would this tax slow BEV adoption?
Messages are certainly becoming more mixed. One of the main attractions of an electric vehicle is that it is very cheap to run, even if it might cost more to purchase. Recharging an electric car at home is extremely economical and, with far fewer moving parts, servicing is simpler and cheaper. Charging per mile would inevitably reduce the incentive to go electric, especially if fuel duty on fossil fuel vehicles remains frozen, as it has since 2011, and the 5p cut introduced when Rishi Sunak was chancellor is maintained. (This reluctance to review fuel duty is purely political, driven by morbid fear of The Sun and its cynical “white van man” campaigns).
On the other hand, and rather surprisingly in our straitened circumstances, the chancellor has found £650m to fund a subsidy on new electric cars – of £1,500 for most models – with a retail price of up to £37,000 or even in some cases £42,000. The “benefit in kind” tax charge on company car users is also temptingly low and very favourable compared to a petrol alternative, and these users will often be people on more than average earnings.
Why do we pay fuel duty anyway?
It goes back to dawn of motoring, the 1909 “people’s Budget” and a resolution laid before the House of Commons that: “As from the thirtieth day of April, nineteen hundred and nine there shall be charged, levied, and paid on motor spirit imported into Great Britain or Ireland a duty of Customs at the rate of threepence per gallon.”
David Lloyd George, then chancellor, justified it as necessary because all heavy new motor vehicles were churning up the roads faster than local authorities could afford to repair them. Funnily enough, weight is also a factor with BEVs because consumer demand for a wider range on a single charge requires big and weighty battery packs. In 1909, duty was set at three old pennies per gallon (equivalent to 1p now) but it now stands at about 52p per litre (equivalent to about £2 per gallon). Given the efficiency of modern BEVs, 3p per mile is actually a rather lower cost of duty in real terms than the Edwardians had to bear.
On the other hand, given that home charging presently means a fuel cost of as low as 2p per mile for a BEV, adding a tax levy of 3p per mile could more than double the marginal cost of a journey.
