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Treasury considers fresh revamp for VED

Motoring

23 March 2020
 

The Treasury has invited views on how the Vehicle Excise Duty (VED) system should be reformed to encourage the take up of zero and ultra-low emission vehicles. 

VED rates for cars have been based on the carbon dioxide emissions of vehicles since 2001. For vehicles registered between  2001 and 2017 the VED rate is based on a system of emission bands. 

Since 2017 a new regime has applied to new car registrations. This sees the first year registration rate based on a car’s CO2 emission band, with significantly higher rates for cars with the highest emissions. In subsequent years, however, the price moves to a standard flat rate.  

“The average carbon emissions of new cars have fallen significantly over the last two decades, with reductions every year until 2016,” says the Treasury. “That average increased for the first time in 2017, by 0.8 per cent, and by 2.9 per cent in 2018. Initial data for 2019 suggests the upwards trend is set to continue, despite modest growth in the sale of battery electric vehicles.” 

The increasing popularity of sport utility vehicles has contributed to the rise. 

The existing banding system has two disadvantages, the Treasury believes. “First, the bands create a ‘cliff-edge’ system that does not reward manufacturers for improving their vehicles’ efficiency within bands. This potentially leads to perverse incentives for manufacturers to produce vehicles with carbon emissions at the top end of VED bands. 

“Second, the differentials between band rates are uneven, meaning any given gram of carbon at the lower end of the tax bands is treated differently to a gram of carbon at the higher end of the bandings.” 

The Government thinks a granular system could address both issues, because it would reward every gram of carbon efficiency. A vehicle that emits 129gCO2/km) would pay less VED than a vehicle that emits 130gCO2/km).  

“A granular system would eliminate the ‘cliff edges’ that currently exist between VED bands. It would provide continuous incentives for manufacturers to produce lower emitting vehicles, and for car buyers to make lower emitting choices through reduced VED liabilities.”

The Treasury is also interested in linking VED rates and carbon emissions in years after first registration. It suggests:

  • introducing multiple standard rates after first registration, such as a zero-rating for zero emission vehicles; a lower rate for vehicles with emissions from 1 to 150 g/km; and a higher rate for vehicles with emissions exceeding 151 g/km; 
  • extending first licence VED for an additional few years, e.g. one to three; or 
  • abolishing the standard rate, and instead linking annual VED liabilities to the first licence charge. 

RAC Foundation director Steve Gooding said: “The trick will be in ensuring any revised system dovetails with company car tax and lease plans, given how few new cars are actually bought outright upfront by individual motorists.”

Responses are invited by 11 June. 

 
 
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