It is anticipated that vehicle excise duty, commonly called car tax, will generate an additional £2.4 billion annually for the Treasury by 2028-29. This revenue growth will be aided by confiscating electric vehicles (EVs).
According to the economic and fiscal outlook report released by the Office for Budget Responsibility (OBR) after the Autumn Statement, VED tax receipts are anticipated to increase substantially over the next five years, from £8 billion in the current fiscal year to £10.4 billion.
According to the OBR, this results from a combination of higher duty rates via annual increases by inflation and the expiration of the VED exemption for electric vehicles in 2025, which will impose a yearly tax for the first time on the owners of over one million battery cars.
The Chancellor must alter fuel duty income predictions by erasing the 5p cost-of-living decrease and lifting the 13-year freeze on petrol and diesel taxation per liter. Commentators argue this would be an imprudent move in a year when general elections are approaching.
Government finances are bolstered by EV taxation
While Chancellor Jeremy Hunt remained tight-lipped in Wednesday’s Autumn Statement regarding policy changes that could have a significant impact on the cost of transportation, the OBR has predicted that Vehicle-Enhanced Delivery (VED) could generate one of the most critical tax revenue increases for the Treasury by the end of the decade.
The document indicates that VED augmented its funds by £7.3 billion during the previous fiscal year.
This is anticipated to increase by approximately £700 million this year due to the significant rate hike that took effect on April 1 and continued through March by the RPI.
However, an increase in car tax receipts is anticipated in 2025, when electric vehicle (EV) owners will no longer be exempt from car taxation and hybrid discounts will be eliminated, as Hunt confirmed in the Autumn Statement of the previous year.
With the Society of Motor Manufacturers and Traders currently projecting annual sales in the United Kingdom to be around 325,000 and the country expected to have one million electric vehicles on the road by February, there should be a fresh quota of at least 1.3 million cars that become taxable for the very first time by March 2025.
It indicates that car tax receipts will increase to £8.8 billion in the fiscal year 2025-26 (from £8 billion in the 2022 budgetary report), £9.3 billion the following year (from £8.2 billion in the 2022 report), and £9.8 billion in the year after that.
Car Tax Projections and Treasury Revenue Growth
The OBR now projects that by 2028-29, the Treasury will generate £10.4 billion from car taxation alone on behalf of drivers.
Instances of non-compliance will lead to £15,000 per vehicle penalties that fall short of the stipulation. However, manufacturers with an excess of EV credits can purchase such credits from other brands (think EV-only manufacturers like Polestar and Tesla).
The objectives of the ZEV mandate now establish a definitive trajectory for adopting electric vehicles, enabling the committee and ministers to calculate the impact on various tax revenues over the following decade.
The OBR document states, “The Zero Emission Vehicle (ZEV) mandate, which goes into effect in January 2024, is now the primary policy driver for EV adoption.”
Advocacy for a Tiered Approach
The statement continues, “We believe it is improbable that sales will significantly surpass this amount throughout the forecast period as a result of allowance trading and borrowing flexibilities during the initial three years of the mandate.”
Its head of road policy, Jack Cousens, stated that while it is “understandably disappointing” that EV owners who purchased their vehicles years ago will be charged VED retroactively beginning in 2025, “it should come as no surprise that they will be required to pay something moving forward” after “years of non-payment.”
However, he notes: “According to the proposed policy, the VED for internal combustion engine (ICE) and electric vehicle (EV) vehicles is identical.”
“In accordance with the government’s Net Zero goals, we have advocated for a tiered approach in which electric vehicles (EVs) pay a reduced rate of Vehicle Emission Duties (VED). This would allow EVs to continue contributing to road maintenance (VED is hypothesized for the upkeep of the Strategic Road Network), while still encouraging consumers to choose EVs.”