Transport Select Committee estimates charging EVs VED will recoup less than 5% of revenue lost from fuel tax
The UK government has confirmed it has no plans to implement road pricing as a replacement for the current vehicle excise duty (VED) system levied on motorists.
Road pricing, a telematics-based system that would charge motorists according to distance driven and the type of vehicle they’re driving, has long been mooted as a potential replacement source of revenue for the government as EV uptake continues to climb in the UK and reduces the amount generated from fuel and vehicle excise duties.
A decision on whether to approve a road pricing policy was expected in the 2022 autumn budget but wasn’t forthcoming. Now, though, in an exchange with the Transport Select Committee (TSC), MPs have revealed there are no plans to implement – or to consider implementing – a road pricing system in the UK.
Responding to a letter from TSC chair Iain Stewart, who highlighted the “potential future loss of £35 billion to the Exchequer from failure to reform motoring taxation” amid the shift to zero-emissions vehicles, Chancellor Jeremy Hunt acknowledged the importance of the issue but said road pricing wasn’t one of the solutions being considered.
“Motoring is an important part of most people’s lives and how they get around. It’s crucial for how the UK’s businesses transport supplies and products. So these are important issues to consider,” Hunt said.
He added: “As the government’s Net Zero Strategy set out, as we transition to net zero, the government will need to ensure that the tax system encourages the uptake of EVs, and revenue from motoring taxes will need to keep pace with this change while remaining affordable for consumers.
“This is so we can continue to fund the infrastructure and first-class public services that people across the UK expect and avoid a rise in congestion, with those able to drive electric vehicles having very low running costs compared to other vehicles and public transport. That would affect everyone on the road and those using public transport.”
Last year, Hunt announced a wide-reaching reform of the UK’s VED system, with EVs to be taxed from April 2025 for the first time and benefit-in-kind (BIK) tax on electric company cars to be raised to 5% from 2027.
“As I set out at Autumn Statement 2022, it’s right that all motorists start to pay a fairer tax contribution,” Hunt told Stewart. “That’s why, from 2025, electric cars, vans and motorcycles will pay vehicle excise duty in the same way as petrol and diesel vehicles. The government is focused on delivering its core priorities, as set out in the 2019 manifesto. As such, the government does not currently have plans to consider road pricing.”
Stewart said the TSC was “disappointed to receive such a delayed and brief response” from the government to its February 2022 report on road pricing and questioned why the government had arrived at this conclusion, given the evidence and recommendations presented in its report.
He told Hunt: “The committee’s inquiry was substantial. We heard from four panels of witnesses, including from Mike Williams on behalf of HM Treasury, and received 148 written evidence submissions. We made 13 substantial recommendations. It is discourteous both to my committee and to the witnesses who freely gave their time and expertise, both in writing and in person, that your department has not meaningfully engaged with the substance of our report nor responded to the specific conclusions and recommendations made.”
He added that “the future of motoring taxation in general” has become a hotly debated topic since the report was published, and several high-profile groups have raised similar concerns.
Stewart said that VED and fuel duty together currently account for nearly £35bn in 2021/22 – “approximately 4% of overall tax receipts”. The Office for Budget Responsibility, he said, estimates that abolishing the VED exemption for EVs will raise less than £1.6bn by 2027/28.
“Your initial response to our report suggests that addressing this enormous deficit in revenue is not considered a government priority,” he told Hunt, inviting the Treasury to respond in greater detail and to give an idea of its timescales for considering “road pricing models”.
In response, Exchequer Secretary to the Treasury James Cartlidge said: “The overriding focus for the government in recent months has rightly been the immediate challenge of inflation and supporting people with the cost of living.”
He added that the government cut fuel duty by 5p for 12 months from spring 2022 and said the government would confirm its future fuel duty policy this spring.
“It is important that the government continues to focus on the cost of living and delivering its core priorities, as set out in the 2019 manifesto,” Cartlidge said.
“I want to stress that I recognise the substantial work that the committee has carried out on road pricing and the committee’s interest in this matter, but as set out in the Chancellor’s previous letter, the government does not currently have plans to consider road pricing. Given this, the government does not have further views on the committee’s recommendations for the ways in which road pricing should be considered.
For a full guide to road pricing, including how it will affect you and where the money will go, read on.
How much tax is raised from vehicles and how is it spent?
Road tax and fuel duty generate £35bn a year in tax revenue, equivalent to 4% of overall tax receipts. The revenue from road tax (£7bn) is allocated to the National Roads Fund for local and strategic road upgrades. Fuel duty (£28bn) is disbursed across the whole of state spending to help fund everything from schools and hospitals to public sector pensions and infrastructure projects.
What’s the problem?
Before announcing that EVs would be liable to pay VED from 2025, the government expected that by 2040, when EVs dominate the UK car parc, very little tax would be raised from motoring. However, the government doesn’t want to discourage the take-up of EVs, so the Transport Select Committee (TSC) suggested introducing road pricing as a means of generating revenue.
What is road pricing?
Road pricing uses telematics technology to charge motorists by distance driven, factoring in vehicle size and type. It also serves another purpose of managing the costs of motoring such as pollution, emissions and congestion. The TSC said that to be seen as fair and acceptable by the public, road pricing “must be revenue neutral, with most motorists paying the same or less than they do currently.” It added that it hadn’t seen a viable alternative to a road pricing system based on telematics.
Could road pricing be introduced?
The TSC said that much of the technology required is already available and that “introducing road pricing is an opportunity for the UK to be a world leader”. It recommended the Department for Transport and the Treasury appoint a body of experts to identify an alternative road charging mechanism by the end of the year.
However, it also accepted that road pricing “has acquired the reputation as a policy that is too unpopular [with voters] to implement”. It said the government “must start an honest conversation with the public” soon because, it warned, as EV drivers become accustomed to tax-free motoring, it may become socially and politically difficult for the Exchequer to extract motoring taxes from them in the future.
What other country has a road pricing scheme?
In 2009, Singapore was the first to launch electronic road pricing (ERP) aimed at reducing congestion. Sensors mounted on overhead gantries communicate with an In-vehicle unit (IU) affixed to each car’s windscreen into which the vehicle keeper inserts a pre-pay card. Cameras record the vehicle’s registration number. Charges fluctuate according to the time of day, with peak times being the most expensive. London’s congestion charge zone was inspired by the system. A road pricing system on the scale of the UK’s would need to be GPS-based.
What alternatives to road pricing has the TSC considered?
Recovering lost revenue in general taxation is one idea, but the TSC said this would be unfair to non-drivers. Pricing electricity used for charging an EV differently from that used for the home is another, but doing so would require costly infrastructure. The TSC said that whatever solution is adopted must not discourage active travel (walking and cycling), which the government is committed to increasing or encourage vehicle use and consequently congestion, which it has pledged to reduce.
What other challenges does road pricing face?
Persuading voters that under such a system they won’t pay any more tax than they do at present will be as great a challenge as establishing one that works nationally, taking into account existing local charging schemes. Equally challenging will be delivering it on budget and on time and ensuring it pays for itself without requiring subsidy. In this last respect, the current tax-based system is extremely efficient.
There’s a question, too, around retro-fitting older vehicles with the means to be tracked and charged, unless these continue to be taxed under the old system. There’s also the issue of influencing driver behaviour with demand pricing, which many will resent, as well as data capture and driver privacy. On this point, the TSC said the government must ensure that data management is subject to rigorous oversight. However, it also heard from witnesses who argued that “data protection is not a top-level for concern for the public who are prepared to provide data access in exchange for efficient services and systems”.
What do motorists think?
Readers writing in response to a recent Autocar opinion piece on the topic had mixed views.
One correspondent accepted that road pricing is fairer than raising general taxes and that, if you have nothing to hide, data privacy isn’t an issue. Another voiced concerns that road pricing will be impossible to make revenue-neutral. Someone else suggested that increasing the tax on domestic energy consumption would be sufficient to plug the revenue gap but was challenged by another reader who pointed out that this would be an intolerable burden on poorer people. Another correspondent suggested taxing cars on the mileage declared at each MOT, but this raises the spectre of people clocking their cars ahead of the test as well as requiring legislation to establish payment liability.
The technology is ready now
As a concept, national road pricing sounds reasonable but someone is going to have make it work. That person could very well be someone such as David Savage, vice president of Geotab, the world’s largest fleet telematics provider.
Operating in 130 countries, it has 2.6 million connected cars on its books and processes over 40 billion data points daily. So Geotab is used to working with big numbers but even Savage admits connecting the 40 million cars on UK roads would be a challenge. “One of our solutions uses black box technology and we’ve got installation down to no more than 20 minutes,” he said. “Even so, connecting millions of cars in a short period might require an operation like the covid vaccination programme.”
He’s joking. In fact, he thinks it possible the government could phase in road pricing as it phases out the current tax-based system. In any case, he said, many modern cars are sufficiently connected for Geotab and others to establish a data link without any modifications.
“Road pricing is not unworkable; the technology exists. What is necessary is that government engages with providers such as ourselves as soon as possible.”
Additional reporting by Felix Page