New ‘Road Duty’ needed to avoid electric vehicle roll-out putting pressure on Britain’s public finances and crowded roads

The UK must – and can – urgently reform its £32 billion of road taxes so that the welcome transition to Electric Vehicles (EVs) does not put pressure on the public finances and road congestion, according to new research published today (Thursday) by the Resolution Foundation.

Where the rubber hits the road – the 36^th report of The Economy 2030 Inquiry, funded by the Nuffield Foundation – notes that the UK’s transition away from fossil-fuel-powered cars is proceeding faster than many experts predicted, with EVs accounting for one-in-seven new cars bought last year.

However, while the rapid take-up of EVs is good news for both the planet and motorists as they are cleaner and cheaper to run – per-mile running costs for EVs are 60 per cent lower than non-EVs – that also presents pressing challenges for policy makers with half of those lower running costs made up of lower taxation, specifically the lack of Fuel Duty, relative to traditional vehicles.

First, the transition from fossil-fuel-powered cars to largely tax-exempt EVs is creating a growing fiscal hole in the £32 billion of revenues currently collected via Fuel Duty and Vehicle Excise Duty (VED). The EV transition is set to drive a £10 billion a year revenue shortfall by the early 2030s.

Second, the UK has internationally high levels of congestion – we spend one billion hours per year sat in traffic, at a cost of £60 billion – and policy needs to play a greater role in tackling our crowded roads.

The authors note that arguments for continuing with far lower rates of vehicle taxation for EVs to encourage take-up are misplaced, with regulations banning the sale of non-EVs by 2030, and lower running costs generally already playing that role.

With higher-income families more likely to buy new electric cars (two-thirds of new car spending is by the richest fifth of households), maintaining big tax-breaks for EVs risk disadvantaging those on lower incomes who can’t afford a new car, says the Foundation.

A new ‘Road Duty’ for EVs – levied at around 6p per mile (plus VAT) – would be enough to offset the fall in Fuel Duty revenues over the coming decade, while maintaining incentives to switch with EVs remaining 30 per cent cheaper to run than non-EVs. This new duty could be collected using GPS data that new EVs are already built with, and paid via monthly direct debits to minimise disruption to motorists.

A GPS-collected system of Road Duty could also help tackle a second big net zero and transport challenge facing Britain – decongesting our roads.

The ability to implement congestion charging via this system would make it far easier to tackle congestion in large town and cities – where 81 per cent of all congestion takes place – ending the need to install expensive vehicle recognition CCTV around congestion zones.

While Road Duty should eventually become the main form of vehicle taxation in Britain, the authors add that non-EVs should continue to pay Fuel Duty instead, so that people who can’t afford to buy a new car aren’t double taxed for doing so.

Finally, the Foundation says that tax policy should avoid reinforcing the ‘pavement tax’ – whereby those with access to off-street parking (76 per cent of the richest fifth vs just 56 per cent of the poorest fifth) are able to charge their EVs far cheaper than those reliant on public charging points. The VAT rate on electricity from public charging points (currently 20 per cent) should be reduced to the same 5 per cent for home charging.

Jonny Marshall, Senior Economist at the Resolution Foundation, said:

“The switch from fossil-fuel-powered cars to EVs is a key part of Britain’s net zero transition, and it’s happening quicker than most people expected. This is good news for the planet and motorists as EVs are cleaner and cheaper to run.

“But unless we modernise road taxation to reflect the cars that are on our streets today and in the future, we risk putting more even pressure on the public finances and our crowded roads.

“We need a new GPS-based ‘Road Duty’ for EVs to offset falling Fuel Duty revenues, and ensure that the Net Zero transition doesn’t leave poorer drivers in older cars bearing the burden of vehicle taxation.

“VAT rates on those using public chargers should also be reduced to the same level enjoyed by those, generally richer households, lucky enough to charge at home.

“Our tax system needs to keep pace with the Electric Vehicle transition, in a way that protects low- and middle-income households.”