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EV taxation: Friends with benefits

Date: 18 June 2021   |   Author: Jack Carfrae

The fleet industry has basked in miniscule electric car tax for more than a year. Jack Carfrae asks what we can expect after the 2025 cut-off, and how the government might replace the shortfall in fuel duty.

It is unlikely that anyone reading this needs an education in the tax perks of electric cars, but a little reminder never hurts. Cast your eye over the KwikCarcost figures included in this article, which compare plug-in and internal combustion equivalents, and the savings over a four-year period are staggering - especially the £29,994 in BIK between the Mercedes SUVs. 

Telling businesses that EVs are a good idea is beyond stating the obvious, not least after more than a year of unprecedented tax breaks. Battery electric and plug-in hybrid car sales were collectively up 6.7% year-to-date, according to the SMMT's May figures - a good chunk of which is down to fleets. We know where we are with company car tax until 2025 and zero-emission vehicles will be a still extraordinarily low 2% at that point; the question is where they will go next. 

Again, nobody needs telling that the Treasury is not exactly rolling in it at the moment, so if there is a tax increase to be had, it seems daft not to go for it - but that would not exactly chime with the government's commitment to no more petrol and diesel cars in eight-and-a-half years. Even with fleets chomping at the bit, those same plug-in hybrid and battery electric cars made up a collective 13.9% of the year-to-date market in May 2021, so Westminster is hardly at a stage where it can start to discourage take up. 

Short of pressing a stethoscope to the Chancellor's door, there is a feeling in the fleet industry that such a low level of tax has to be on borrowed time, and EV rates are likely in for a hike in the middle of the decade. 

"I think that they [HMRC] will find it quite difficult to do anything other than a steady increase," suggests KeeResources' head of TCO, Mark Jowsey, "I think they can get away with that - but it's starting from such a low level that, arguably, they may feel they have to put it up 2% per annum or 5% for the next three years [after 2025]." 

Assuming Jowsey's prediction or something like it comes true, the government has a lot of room to begin taxing plug-in vehicles before they reach anything like petrol and diesel levels, so much so that some tax experts have done their homework to see what that might look like. 

"One thing we've done with a couple of clients - and I did it with my own car - is say 'OK, if tax went up by another 5%, rather than 2% on a full electric car, it would be 7%, so what difference does that make?'" says Simon Down, associate director at Deloitte. The company declined to share his calculations, but Down said there was "a lot of space for them to ramp it up before it becomes an issue".

Although a gradual increase in the second half of the decade seems likely, there is a worry that the government could backtrack on its existing plans and begin taxing EVs more heavily within the next three to four years. 

"I'm not saying that I think they will change anything they've got in place at the moment, but they have gone back on things previously," adds Jowsey. He is referring to the once-planned removal of what was then a 3% surcharge for diesel cars; chancellor of the time, George Osborne, promised to get shot of it from April 2016 - then reinstated it in the 2015 Autumn Statement. Two years later, Philip Hammond slapped another 1% on top. 

Anyone who has been in the fleet management game for at least a couple of years will have none-too-distant memories of the Treasury's previously lax approach to setting out future company car tax schemes, and the industry is already calling for longer-term clarity on benefit-in-kind. The AFP launched a 13-point tax manifesto in April 2021, point one of which was a campaign for tables until 2029/30, which it claims are necessary to meet the government's EV targets. 

The organisation's chair, Paul Hollick, points out that those in the business of four-year leases are already into unknown territory when it comes to the very end of their contracts.   

"We're not too far away from 2024/25 in terms of that three-year cycle, and as soon as we get into next year, that will be shorter than three years. Then what are we going to be telling employees? 

"There's a chance, when they've got a three-year lease - or a four-year lease in particular - that they could be paying a bucket load of tax at the end of it. Then there's everyone pushing towards salary sacrifice. It just creates a level of uncertainty that isn't good."

Critical though it is to fleets, company car tax is small potatoes compared with the mammoth in the room that is fuel duty. It netted the government between £26-28bn a year during the past decade - the equivalent to around £1,000 per household and 1.3% of national income per year, according to the Office for Budget Responsibility - but lower levels of travel during the pandemic shaved £6.7bn off the 2019-2020 takings, leaving the Treasury with a comparatively measly £20.9bn from the previous tax year. 

If electric vehicles end up as prolific as planned, then the government is going to be counting the moths in its wallet, and it will have to come up with an alternative way of deriving income from anything with wheels.  

Road pricing is one of the more frequent suggestions and certainly on the government's radar. In April, The Times reported that research to be submitted to the cross-party transport committee by Greener Transport Solutions - a not-for-profit academic group advocating zero-carbon transport - said charges based on emissions, vehicle weight and traffic levels should replace road taxes by 2030. It suggested drivers should be incentivised to join the scheme from 2023 to maximise time for it to bed in. 

Apart from not being much of a vote winner, the other problem with road pricing is that it would be a tricky thing to implement, as Chris Chandler, principal consultant at Lex Autolease, explains: "Road pricing seems simple, but it does have some fairly significant issues. One is the size and complexity of the IT and monitoring systems required if you are looking at tracking every vehicle on the road that doesn't use petrol or diesel that will, we assume, carry on paying duty on the fuel. 

"It also moves into an issue where you have effective tax collections based on that road charging. At the moment, fuel duty is an easy tax revenue for HMRC, because it's done through the petrol retailers, so you'd need to set up a system to collect those taxes. It's something that, I would imagine, would take a good few years to bring in."  

Hollick believes some form of road pricing is on the cards and agrees that it would have to be sophisticated instrument to thrive: "My belief is that they [the government] do want to try and deploy some element of road toll in before the end of the decade. 

"Therefore, would that include BIK tax? Would that include the road fund licence? Do you then bring in some of the strands that you've got around UK taxation together? That would create a simpler solution, where you're just taxed for the amount of miles that you travel on the roads. Mix it in with clean air zones. and it's going to be quite fascinating in terms of what they want to do."

Taxing electricity at an equivalent level to fuel is a theoretical but nigh-on untenable solution. You do not hike the duty on things you want to encourage, especially when they start off both more expensive and less practical than the thing you want to replace - and the uproar when the plug-in car grant was cut in March 2021 proves that electric vehicles are still nascent and fragile enough to rely on a long-standing government subsidy. 

As with road pricing, the practicalities of calculating and deriving income from electricity are just as big a problem - if not a bigger one. "One of the difficulties is if you were to actually tax electricity differently for road transport as opposed to domestic energy," says Chandler, "electricity is everywhere - you have people with solar panels charging their vehicles - so I think it's fairly widely regarded that it's difficult to try and put a duty rate on the electricity itself."

All this and more is what led HMRC to conduct a consultation on VED between March and September 2020. It said it wanted to "move towards a more dynamic VED system and [establish] how VED can support a reduction in road transport emissions."

There were 43 consultations listed on HMRC's 'Consultation Tracker' spreadsheet at the time this article was written and, although the 'Call for evidence on VED' was closed, it is perhaps not surprising that the 'Draft legislation' and 'Expected legislative vehicle' cells were blank.  

For now, the filler for the Treasury's impending coffers chasm seems as much its guess as it is ours.