Last reviewed 6 September 2023

From a taxation perspective, the rise of electric vehicles will pose a profound challenge to the nation’s finances, as receipts from fuel duty begin to decline over this decade. The Centre for Policy Studies (CPS) has published a paper suggesting that a per mile charging system may be the answer, with some of the proceeds earmarked for improvements to passenger transport. In the context of the sale of brand-new internal combustion engine cars being banned in the UK from 2030, this article will examine to what extent such a change will be possible or likely.

Unfair to drivers?

According to the CPS, motoring has been treated as a cash cow, with drivers paying far more through taxation than is invested back in the road network. With 88% of the miles travelled in 2021 being via car, van, or taxi, it went on, current policy is letting drivers down. In The Future of Driving, available here, the Centre highlights that the Office for Budget Responsibility (OBR) has identified the £25 billion fiscal black hole that will be left when receipts from fuel duty dwindle as the largest single long-term fiscal cost of successful decarbonisation. The report’s answer is a fundamental shift in the way road use is paid for, away from fuel and vehicle excise duties (VEDs) and towards a “pay as you drive” system.

It argues that this should be accompanied, within major urban areas, by the use of clean air zones (CAZs) to incentivise those driving the most polluting vehicles to upgrade to cleaner ones — supported, the Centre suggests, by generous scrappage schemes funded by the resulting revenues.

Pay as you drive

Such schemes should initially apply only to Zero Emissions Vehicles (ZEVs), which pay nothing for their usage of the road today. The CPS argues that greater hypothecation of revenues is likely to be a useful tool in building and sustaining support for a new “pay as you drive” system. The focus groups it consulted have confirmed that linking the funds raised to road improvements would increase people’s support for the system overall.

While “pay as you drive” should eventually apply to all vehicles and serve as a comprehensive replacement for fuel and VEDs, the Centre sees an immediate “big bang” reform as impractical and likely to backfire politically. So how does it see such a system being introduced?

One step at a time

The report suggests:

  • when the per mile charging system is introduced, it should include electric vehicles (EVs) but the aim should be that ZEV drivers still pay significantly less than their petrol and diesel counterparts

  • charges for ZEVs should not come in until later this decade so as not to prevent take-up of more environmentally friendly vehicles

  • each vehicle should be assigned a per mile rate, based on its weight (to reflect wear on the roads)

  • drivers should be allowed to choose from a variety of technological options that could be used to implement such a scheme, ranging from low-tech (submitting their mileage manually) and midtech (an on-board device that transmits mileage automatically) to high-tech (GPS tracking)

  • drivers should be given a “free mileage allowance” based on their postcode with drivers in remote areas (with limited or non-existent public transport options) receiving a higher allowance than those in major urban areas well-served by trains and buses.

In the long run, the report concludes, the Government may wish to combine clean air, congestion and per mile charges into a single nationwide charging scheme. In the nearer term, however, it argues that treating congestion and air quality as the local issues that they are, while letting the Government focus on implementing a simple “pay as you drive” per mile charging system for ZEVs, would make more sense.

What do drivers pay now?

Drivers in the UK are currently subject to two principal motoring taxes. Vehicle excise duty (VED) is levied on vehicles registered in the UK; fuel duty is levied on fuel used by motor vehicles. The Treasury, has calculated that ,taken together, VED and fuel duty raise some £35 billion a year, which comprises approximately 1.5% of UK GDP. That sum is forecast to equate to approximately 4% of overall tax receipts in 2021–22 and it is estimated that the revenue raised by fuel duty is equivalent to approximately five pence on the rate of income tax.

The Treasury has described fuel duty as almost a “perfect tax” and the Road Haulage Association (RHA), giving evidence to a Parliament’s Transport Committee, explained that “the fuel duty system, as a proxy for road use, is in itself reasonably transparent and reasonably fair. The more fuel you use and the heavier the vehicle, the more you pay”. However, it noted, the relationship between usage and taxation will be lost as drivers transition from petrol and diesel-powered vehicles to greener alternatives. The Transport Committee concluded that, without radical reform, policies to deliver net zero emissions by 2050 will result in zero revenue for the Government from motoring taxation.

Support for change

The Campaign for Better Transport (CBT) agrees that it is only fair that drivers pay their share of tax to address the economic costs incurred by motoring pollution and congestion. It has also emphasised the importance of investing proceeds in public transport as well as roads maintenance and called on the Government to establish a cross-party commission as early as possible on how to reform vehicle taxation fairly to plug the revenue gap created by the rollout of EVs.

The CBT has pointed to a report it published in September 2022 that showed that 49% of people supported replacing fuel duty and VED with a pay-as-you-drive scheme while just 18% opposed the idea. Pay-as-you-drive: The British Public’s Views on Vehicle Taxation Reform (available here) suggested that a pay-as-you-drive scheme would have the added benefit of bringing an immediate tax cut to drivers with the removal of VAT on fuel duty. As with the CPS report, the CBT called for a proportion of the revenue to be set aside for road maintenance and public transport improvements.

CBT Head of Research Silviya Barrett, who wrote the report, said: “Our research found that many of the common concerns around road pricing, things like protecting people’s privacy and not penalising people who need to drive, can be overcome with a well-designed pay-as-you-drive scheme”.

Dartford trial

Testing the concept of pay-as-you-drive in a real life situation, the independent watchdog Transport Focus has examined the situation at the Dartford Crossing, the busiest river crossing in the UK and the only part of the National Highways network where drivers must pay a charge to cross. With more than 160,000 vehicles a day using its tunnels and roadways, it was decided to ask drivers using this key piece of national infrastructure to take part in a pilot survey over the last year, to find out more about their experiences when using different payment methods.

By March 2023, when the survey closed, 539 passengers had shared their thoughts with around two-thirds saying that they were happy with their experience using the crossing.

Government disagrees

The Government has already announced that it will bring in a new car road tax for EVs. According to HM Revenue & Customs (HMRC), this measure will equalise the VED treatment of all zero emission and internal combustion engine (ICE) vehicles from April 2025. This change will apply to both new and existing alternatively-fuelled vehicles (AFVs). Zero emission cars first registered on or after 1 April 2017 will be liable to pay the lowest first year rate of VED which currently applies to vehicles with CO2 emissions one to 50g/km. From the second year of registration onwards, zero emission cars will move to the standard annual rate. Most zero emission vans will move to the standard annual rate for petrol and diesel light goods vehicles.

“The Government will continue to use the tax system to support the transition to electric vehicles, including using favourable first-year VED rates for the lowest-emission cars; favourable Company Car Tax rates for low-emission vehicles, and through generous first year capital allowances for zero-emissions cars and vans as well as for EV chargepoint equipment” HMRC explained. Removing the VED exemption from April 2025 will marginally reduce the incentive to switch to EVs, it agreed, but suggested that the impact should be minimal given the marginal cost of VED compared to the overall cost of a vehicle.