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TAX LATEST: Brown urges EU to cut VAT for green vehicles

Date: 25 July 2007   |   Author: Guy Bird

Gordon Brown

A plan to slash VAT to a third of current levels for greener consumer products - including cars and vans - has been announced by Prime Minister Gordon Brown.

The idea would see a reduction of the current 17.5% VAT rate to 5% for low emission vehicles - as well as suitably green insulation materials and energy-efficient light bulbs. Greener fuels like biofuels might also qualify. On only a circa £10,000 car it could mean a saving of £1250 on the list price - much more significant than the few pounds lost or gained on VED every year.

Brown made the 'eco VAT' proposals on a joint platform with French President Nicolas Sarkozy on July 20 and the two leaders are now pushing other European countries to back the move so the European Commission can put forward proposals in early 2009.

This lobbying is key as such a reduction would need the unanimous backing of all 27 EU member states to avoid what the Commission terms "unacceptable distortions of competition when consumers buy in other member states in order to benefit from reduced prices."

The specifics of how a vehicle might qualify for such a reduction is not yet clear but a low - potentially sub-120g/km - CO2 rating would seem a logical place to start given current tax rules.

As to how this might affect vehicle transactions for businesses - which can often recover some or all of the VAT - it's obviously early days although industry expert Colin Tourick told BusinessCar: "As long as leasing companies will also be able to charge a reduced rate VAT for leased vehicles it will be a good thing for the fleet industry. However, if all it does is change the price from the dealership it will only benefit businesses outright purchasing - and of course private customers."