A new ‘road duty’ for electric vehicles (EVs) – levied at around 6p per mile (plus VAT) – has been recommended to offset a decline in fuel duty.
Think tank the Resolution Foundation is urgently calling for the tax change in a new report - Where the rubber hits the road – to plug the predicted shortfall in road taxes from the switch away from internal combustion engine (ICE) vehicles to electric.
The EV transition is set to drive a £10 billion a year revenue shortfall by the early 2030s.
The Resolution Foundation report says 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.
It also claims that, 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.
This appears to ignore the signficant numbers of employees adopting EVs through salary sacrifice and company car schemes.
Nevertheless, it says that the 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 20% cheaper to run than non-EVs.
The duty could be collected using GPS data and paid via monthly direct debits.
It also notes that the ability to implement congestion charging via this system would make it far easier to tackle congestion in large town and cities – where 81% 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% of the richest fifth vs just 56% 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%) should be reduced to the same 5% 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.”
The Resolution Foundation report comes in the wake of another road pricing report from the think tank the Centre for Policy Studies.
It also called for a ’pay-as-you-drive’ tax to be introduced for EVs to replace lost revenues from fuel duty and VED.
Thom Groot, CEO of The Electric Car Scheme, says as electric cars use the roads and contribute to wear and tear just like ICE vehicles, it makes sense that EVs should pay for their upkeep, which they will from 2025 onwards through the updated road tax.
"Imposing a 6p/mile charge on electric cars just to fill a potential gap in a balance sheet would be a ludicrous case of the Government cutting off its nose to spite its face," Groot added.
"Electric car adoption is on the rise, but they still represent roughly 1% of cars on the road. Any gap in fuel duty can squarely be placed on the Government's decision to freeze it for the last decade."
Furthermore, he said: "We need to do all we can to drive EV adoption, both for the good of the planet and for the Government's balance sheet.
"Fossil fuel cars cost the NHS billions of pounds a year and the potential damage of climate change to the Government's finances are incalculable. So why on earth would we work to discourage people from making the right decision and going electric?"