The dawn of the electric car might be good for the environment, but it’s about to cause an almighty headache for the tax man.
As the years go on and fewer motorists need to buy petrol, around £25bn in fuel duty receipts will vanish.
How to address this, experts say, is one of the big decisions facing Labour’s Rachel Reeves after taking charge at the Treasury. So, what’s a chancellor to do?
The answer, according to think tanks and economists, is conceptually simple but politically explosive: a pay-per-mile tax on electric cars. This would plug the yawning gap in the Treasury’s coffers and ensure drivers of all cars – both electric and petrol – pay their fair share, say supporters.
Such a scheme was previously considered under Rishi Sunak when he was chancellor, while Sadiq Khan, London’s Labour mayor, has also spent millions of pounds examining how it could work in the capital.
And there are good reasons to think the idea will soon cross Reeves’ desk as well.
The most widely backed proposal among experts is a fixed per-mile charge on new electric vehicles (EVs). Yet this will only work if it is adopted early when the number of EVs on the roads is still small.
This means most drivers will become used to paying it from the off, argue supporters. But that window of opportunity is closing fast.
By 2030, one in five cars on the road will be electric, compared to one in 25 today, according to forecasts by Auto Trader. That means a decision will likely be needed by 2029 – the final year of Labour’s current term in power.
Meanwhile, with EV drivers currently paying far less in tax than petrol car drivers, there is an issue of fairness at stake.
A typical petrol car driver pays 19p per mile travelled, compared to about 7p per mile paid by EV drivers, according to a report by the Resolution Foundation based on 2022/23 prices.
Transport experts say higher taxes are needed to reduce congestion as well – with motorists already wasting one billion hours stuck in traffic every year.
“Unless we want to lose an awful lot of tax revenue, we’re going to have to move to some way of taxing driving and the obvious way to do that is some kind of road pricing,” says Paul Johnson, director of the Institute for Fiscal Studies and author of Follow the Money, a book about tax and spend policy in the UK.
“My view is that we need to do this relatively quickly. But obviously, that’s politically difficult.”
Fuel duty, which currently costs 52.95p per litre of petrol, effectively taxes drivers for the distance they travel already: the more you drive, the more fuel duty you end up paying. On top of this, petrol car drivers pay VAT on top of fuel duty and vehicle excise duty, also known as “road tax”.
There are currently no equivalent taxes on EVs, although they will be charged vehicle excise duty from next year, while VAT is also levied on public charging.
Despite this, introducing a pay-per-mile tax scheme for EVs will be fraught with political risk. Some 55pc of motorists remain opposed to any form of pay-per-mile taxation, a poll by The Green Insurer found in May, with just 17pc saying they were in favour.
A further 28pc said they would only support such a scheme if it were introduced in cities only, owing to concerns about poor public transport provision in rural areas.
Pay-per-mile in practice
So how would a pay-per-mile scheme work in practice? That depends on how complicated you want it to be, says Steve Gooding, director of the RAC Foundation.
Gooding is a former Department for Transport civil servant who helped work up proposals for road pricing schemes under the previous Labour government which were never fully implemented. However, congestion charges were subsequently introduced in London and some other cities.
The simplest solution by far, he says, is to charge drivers a flat rate per mile driven, which would then be checked on an annual or more regular basis.
This would be relatively simple to administer and is comparable to how energy companies take readings from your gas and electricity meters. Collecting readings could be made easier by incorporating it into a car’s MOT check or asking insurers to collect the data as part of getting your cover renewed.
Under this model, HM Revenue & Customs could predict how many miles it expects a driver to travel and then issue rebates or extra bills depending on whether you undershoot or exceed that number, says Gooding.
“You need something that can work for everyone”, explains Gooding. “This is potentially a system that is going to have to capture data from millions of drivers, making millions of decisions, smoothly, 365 days a year.”
The average private car is driven about 6,500 miles per year, according to official data. So for a simple scheme charging 6p per mile, plus VAT – as suggested by the Resolution Foundation – a typical car would be liable for £468 per year. (The suggested charge should also rise annually with inflation, the think tank suggested.)
This would bring the cost of driving an EV closer to parity with petrol, while still keeping it lower to incentivise EV adoption, the Resolution Foundation added.
For comparison, the £25bn collected in fuel duty per year translates to roughly £830 per household.
The Resolution Foundation argued basic pay-per-mile should be adopted largely out of practicality, in conjunction with congestion charging in cities. It also urged ministers not to “let the perfect be the enemy of the good”.
But the think tank also suggested this vanilla version of road pricing was a “stepping stone” towards the more sophisticated schemes many economists would prefer.
These would take account of far more than just the number of miles you travel, instead charging you varying rates per mile depending on the roads you used and when you used them.
Under such a model, you might be charged a higher rate per mile to use the M1 to drive from London to Leeds than if you had used A-roads and B-roads. Or you might be charged a higher rate to use the roads during rush hour than if you travelled at quieter times of the day.
And with the amount of technology packed into electric cars, it would be relatively easy to collect the data, says Gooding.
“New cars are festooned with clever electronics,” he says. “The car knows how many miles it’s done, it knows where it has been and it is routinely sharing that information.”
This data could be beamed directly from your car – via the internet – to either your insurer or the manufacturer, before being sent on to the taxman.
The most straightforward version of this type of scheme would charge fixed prices for certain roads and times.
But an even more sophisticated model would use real-time data to decide how much to charge, based on how busy the roads were at particular times on particular days – essentially an Uber-style form of surge pricing.
Again, this would probably rely on data from your car, as well as public infrastructure, such as cameras.
This sort of approach has been backed by the Campaign for Better Transport and others who say it would incentivise more people to use public transport.
Some countries are already introducing per-pay-mile pricing for HGVs, but only a few have done so for cars.
Andrew Crudgington, of the Chartered Institution of Highways and Transportation, says US states including Hawaii, Oregon, Utah, Virginia and Vermont are rolling them out, with more to follow.
These tend to begin with drivers self-reporting, for instance by taking a photo of their mileometer at the end of the tax year.
In New Zealand, drivers of electric cars and trucks instead buy “licences” for a set number of miles in units of 1,000km.
“It does not have to be complicated,” Crudgington explains. “Many places are now going in this direction.”
‘Big Brother cash grab’
But pay-per-mile risks being both politically controversial and fraught with privacy issues, with critics arguing such road pricing schemes amount to a “Big Brother cash grab”.
How long, for example, before governments start tracking your speeds remotely as well?
Such a market-focused approach could also have unintended consequences for a Labour government’s traditional supporters – employees who must physically go to work at certain times and have a limited ability to choose when they use the roads.
“In any initiative like this, there are going to be winners and losers,” warns Gooding.
“Someone could rightly say, ‘Hang on, I didn’t ask to work this shift pattern at Heathrow Airport and I’ve got to use these roads – but now you’re going to charge me extra just so I can get to work’.
“Post-Covid, we don’t all go into our offices every day of the week. But who are the people who do? They work in hospitals and schools, they are the key workers like care workers who visit people’s homes. So this is very tricky stuff indeed.”
With the clock ticking down, the Chancellor does not have long to make up her mind.
But as Reeves will no doubt learn, pay-per-mile could quickly become a political elephant trap if Labour gets it wrong.
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