Electric cars are to be subject to vehicle excise duty for the first time under measures to be introduced by Jeremy Hunt, the UK chancellor, in this month’s Autumn Statement.
People briefed on Hunt’s plans said that applying road tax to electric vehicles was the first sign of a chancellor “dipping a toe in the water” to address the fall in motoring tax revenues caused by the transition to battery-powered vehicles, as their owners also avoid paying fuel duty.
Last year the Treasury warned that “new sources of revenue” would be needed as the country switches to EVs. Fuel duty and VED raise about £35bn for the exchequer but the Office for Budget Responsibility has forecast that the growing share of electric car sales would cut motoring tax revenues by £2.1bn by 2026-27.
The introduction of excise duty, or VED, to electric cars could take effect from 2025-26, according to officials briefed on the plan, although the Treasury declined to comment on “speculation” ahead of the November 17 fiscal statement.
There are more than 1mn electric vehicles on UK roads, with annual sales rising exponentially. Around 15 per cent of the new vehicles sold so far this year run on batteries, according to the SMMT industry body. Current sales growth means there are likely to be several million battery cars on the road by the middle of the decade.
Owners of most petrol and diesel cars pay £165 a year in road tax and continuing the VED exemption for the growing fleet of electric vehicles could cost the exchequer around £1bn a year by the middle of the decade.
Although the sums involved are not huge at this stage, the introduction of road tax on EVs is seen by Treasury insiders as evidence of a “direction of travel”, with more taxes likely to be levied on them in years to come.
A Treasury review in October 2021 warned that reaching the UK’s 2050 net zero carbon target would lead to receipts drying up from five taxes: fuel duty, vehicle excise duty, landfill tax, the carbon price floor and the emissions trading scheme.
It said the transition to electric vehicles would create a temporary tax vacuum equivalent to 1.5 per cent of gross domestic product by the 2040s that could only be partially replaced by carbon taxes. The alternative to new taxes was more state borrowing, which would not be responsible, it concluded.
Earlier this year the OBR also noted that the exchequer faced looming challenges from the growth in electric car sales, as it forecast they would reach 59 per cent of total sales by 2027, up from 11.6 per cent last year.
While electric cars currently remain more expensive to buy outright, their lower running costs, which include savings on running and servicing costs, as well as zero VED, help motorists to bridge the price gap with petrol and diesel models.
Ministers have provided an array of financial incentives to encourage drivers to buy electric cars, ranging from purchase discounts and vehicle tax breaks, to generous treatment under company car schemes.
But as sales have taken off, incentives have been slowly unwound to prevent a drain on the public purse. Purchase grants that were once £5,000 have been whittled down to £1,500, and will disappear completely next spring.
Industry figures said the company car tax benefit remained the single largest incentive to buyers who are able to use such schemes, and that cutting those would have a much larger impact than applying VED. But they conceded that maintaining tax breaks for electric vehicle drivers would become increasingly unfair as they become more commonplace.
The price of electric cars is expected to fall during this decade as battery technology improves and mass production allows the industry to cut costs.