Vehicle Excise Duty (VED) (often also called ‘vehicle tax’, ‘car tax’, or ‘road tax’ based on historic terms, use and people’s views), is levied as an excise duty. It is payable for most types of vehicles used (or parked) on a public road in the UK. A Statutory Off Road Notification (SORN) must be made for a registered vehicle that is not being used on the road, and has been taxed since 31 January 1998. The Driver and Vehicle Licensing Agency (DVLA) believes that 98.6% of vehicles on the road are correctly taxed.
The UK had many vehicles on its roads at the end of the third quarter of 2016 including:
- 31.81 million cars
- 1.36 million motorcycles
- 3.89 million light goods vehicles
- 0.52 million heavy goods
- 0.17 million buses and coaches
- 0.75 million other vehicles
Vehicle tax was introduced in the 1888 budget while a variation of the current system of excise duty specifically on motor vehicles dates from 1920. Originally the excise duty was destined for road construction. It was paid directly into a special Road Fund between 1920 and 1937 after which it was treated as general taxation. Even when it was used specifically to fund road construction most of the finance for construction and improvement was gained from other sources (general and local taxes). VED income alone was inadequate for the upkeep of the roads.
The current VED system, based on vehicle emissions, was introduced in 2001 as part of a push to reduce pollutants being released into the atmosphere. Vehicles emitting more pollutants cost more to tax, as part of an effort to persuade drivers to consider buying cleaner vehicles.
VED, is collected and enforced by the DVLA. It raised £5.9 billion in 2014/15 falling to £5.6 billion in 2015/16. The declining potential revenue to the government has clearly been a stimulus to further changes to be introduced in 2017.
DVLA accounts show the cost of collecting VED fell over the same period from £158.9 million to £143.4 million. This is largely in line with the DVLA prediction from the changes that it introduced in October 2014. At that point the need for drivers to display a paper disc was removed.
An analysis of road users carried out in the summer of 2016 suggested that around 1.4% of vehicles were being driven without VED. This represented a large increase compared with an estimate of 0.6% in a similar study in 2014. This was widely predicted by motoring associations at the time the change was brought in. The change suffered many administration problems at the outset, leading to thousands of innocent motorists having their cars clamped. Many of those who had not taxed their car may well have failed to receive official notices in the post reminding them to get their tax renewed. Under the old scheme, the tax disc provided a visual reminder of when the tax was due. It was also easy for police to spot untaxed cars on the streets, though this role has effectively been handed over to number plate recognition cameras. This has resulted in a DfT estimate that the number of untaxed vehicles now represents a loss to the government of £80 million (compared with £35 million in 2013). Now clearly some of this will be recouped as the DVLA chases tax evaders and one assumes that much of this is the ‘teething costs’ of change.
In November 2016 it emerged the DVLA had immobilised or towed away almost 100,000 cars in the past 12 months. That represented a large 58% increase on the previous year. It said it now posts almost 3 million reminders each month, at notable cost. Eventually the changes can be expected to lead to less evasion as much of the system moves to direct debit. So reduced costs and less evasion appears to be progress. One of the tests of a good tax is that it is cheap to collect and clearly the removal of the paper tax disc was an attempt to reduce costs, albeit the transition has not been smooth. Of course all collection costs could be virtually eliminated by including the duty with say fuel taxes. The downside of that is it would mean that it is paid by the road users in (some) proportion to use but would not reflect the more environmental impact.
VED levels are complicated being based on emissions. The 2017 changes have been encouraged by the car manufacturer’s response to the carbon emissions issue. They have produced increasingly efficient cars, partly with the generous VED bands for lower emissions as a stimulus (oh and of course we have had the manufacturer’s deception scandal). In many ways this can be seen to have been a mark of the success of the duty.
For cars registered since March 2001, car tax rates are based on thirteen car tax bands (A to M), each band being defined by a range of tailpipe CO2 emissions as measured on the official test. VED for vehicles registered before March 2001 is still determined by engine capacity. Owners of cars with engines equal to or smaller in capacity than 1549cc (roughly equivalent to 1.5-litres) have to pay £145 a year and owners with cars with engines larger than 1549cc pay £235 a year. This seems strange since at the time of a compulsory annual MOT there is an emissions test, so it would be perfectly possible to reflect the actual output of a vehicle though the costs of administration probably rule out a change for what is a small part of the vehicle parc.
It is believed that 25% of new cars registered now do not pay any road tax because they fall into VED Band A (for vehicles with CO2 emissions of less than 100g/km). Currently, new cars have to reach Band D (121-130g/km) before any significant annual road tax is charged.
Pre-April 2017 vehicle VED tax bands (£s)
Major VED changes were set in motion by the former Chancellor of the Exchequer, George Osborne. The effect can be expected to be far higher government revenues because the changes involve higher tax prices for all new cars in their first year but a lower fixed annual rate of £140 for most cars applying for road tax renewal thereafter. The idea is also that there will be a new road improvement fund with VED paying directly for road repairs. By 2020 it is expected that all VED revenues will be directed to the road maintenance budget (so reverting to a road tax).
Clearly it is impractical to invest £12.16 billion in a one-off catch up on road conditions which is the amount needed as identified by the Asphalt Industry Alliance. Evidence suggests we currently spend just £144.3 million on pothole filling and a further £23 million in compensation to motorists claims. It is not just public money. It is estimated potholes cause £100 million to motorists in broken parts. The Asphalt Industry Association identifies there is a shortfall in the road structural budget of £548.6 million a year.
VED is being overhauled from 2017 because under the existing scheme more and more cars are becoming exempt as they fall into VED Band A for vehicles with CO2 emissions of less than 100g/km. In a budget speech Mr Osborne suggested that it is unfair that those who can afford new cars pay no tax while those who can only afford used vehicle have to pay tax when both are using the roads. It is difficult to argue with that logic but it merely questions why the first year rates were introduced. It is disappointing that a tax sets out to achieve a change in behaviour, only to have the rules changed when it reaches that objective. However, if the promise to return the funds to roads then there is at least some consolation for drivers.
Post-April 2017 vehicle VED tax bands (£s)
In conclusion, while VED does not affect the volume of driving, or congestion, it has changed manufacturer’s behaviour (aided by changes to the information at the time of a new car purchase). In many respects it is an example of a tax that has changed behaviour (albeit by the manufacturers and by default consumers) for environmental benefit. Now it appears to be turning full circle and contributing to road construction and maintenance.