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When will tax breaks for electric vehicles end?

As more drivers switch to electric, speculation is growing on how the Government will fill the hole in its finances caused by a drop in fuel duty income.

15 October 2021

When will tax breaks for electric vehicles end?

Fuel duties are levied on purchases of petrol, diesel, and other fuels. They represent a significant source of revenue for government, equating to £1,000 per household and 1.2 per cent of national income. In 2019-20 fuel duty raised £28 billion. VAT is applied after fuel duty (currently 57.95 pence per litre for petrol and diesel), so drivers are also paying VAT on the duty.

As some of this income should be reinvested in road repair, how does the Government plan for electric vehicle owners to contribute to road maintenance?

In a survey of 300 motorists by Venson Automotive Solutions, the majority (87%) agree that a financial solution to counter fuel tax losses from growing electric vehicle (EV) adoption is needed.

More than one third (38%) of respondents backed the introduction of a new EV tax, which could see drivers of heavier vehicles paying higher taxes.

Simon Staton, client management director of Venson Automotive Solutions, said: “Whilst it’s not anticipated that plans for a new EV tax will be revealed by the Chancellor in his October Budget, there is pressure on him to outline a 10-year trajectory to establish a financially viable means to achieving zero emissions in the UK.

“However, our survey findings confirm an understanding by the public that some sort of EV tax or related user charges will be necessary, which should offer Government assurances that people are mentally preparing to make the switch, if they haven’t done so already.

“A favourable tax regime, together with a raft of new models and significant growth in the charging network, will play a vital part in accelerating our journey along the road to zero.”

The fleet industry is warning that momentum in switching to electric is at risk, with many fleets and drivers being forced to consider lease contracts for BEVs (battery electric vehicle) without knowing the tax they will be charged over the full duration of the agreement.

The Government has committed to keeping BIK tax rates low for electric company cars but only until March 2025.

Pay as you drive

More than one-in-five respondents (22%) favoured a nationwide road pricing ‘pay-as-drive’ scheme, with a further 31% saying they would support a ‘road miles’ system, which would see charges incurred by plug-in drivers with higher mileage use.

Estimated £40billion shortfall

The lost income from fuel duty, combined with lost income from ‘car tax’ (vehicle and excise duty) has been estimated at £40 billion. MPs on the transport select committee launched an inquiry into zero emission vehicles and road pricing in December, spurred on by the Government's decision to bring forward the ban on new petrol and diesel vehicle sales to 2030.

A report by the not-for-profit organisation Greener Transport Solution, also calls for a pay-per-mile scheme to be mandatory in 2030, but voluntary for EV owners from 2023. 

Burden on rural vehicle drivers

Any Government pay-per-mile, or road usage scheme, will need to be fair to drivers in rural areas who have to drive longer distances as part of their everyday lives.

In France, rises in fuel tax set off a month of nationwide protests in 2018 —eventually leading to riots in Paris. Originally, protesters were from rural areas who said they couldn’t afford to pay Macron’s ‘green tax’. Nicknamed for the safety vests worn by protesters, gilets jaunes, the yellow vest movement sparked a political crisis for the French government, causing Macron to U-turn on a range of planned tax hikes.

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