Vehicle Excise Duty (VED) is a tax charged on all non-exempt “mechanically propelled vehicles” used or kept on public roads, as legislated in the Vehicle Excise and Registration Act 1994, as amended. The Office for Budget Responsibility (OBR) explains that the Driver and Vehicle Licensing Agency (DVLA) collects VED, rather than HM Revenue and Customs (HMRC).
Broadly speaking, there are three different rate schedules for cars, outlined in the DVLA’s V149 VED rates document. For cars that are first registered on or after 1 April 2022, their VED rate is dependent on the car’s carbon emissions for that year (this is the ‘first year rate’). For cars first registered on or after 1 April 2017, VED is charged at a yearly flat rate (currently £165) for all petrol and diesel cars. Cars registered between 1 March 2001 and 31 March 2017 are charged VED on a yearly basis based on the car’s emissions rate. Cars with a list price above £40,000 pay a surcharge (the ‘expensive car supplement’), currently set at £355, for the first five years following the first year of registration.
Electric cars are currently exempt from VED altogether, including the expensive car supplement.
Autumn Statement 2022 policy changes
In the 2022 Autumn Statement, Chancellor Jeremy Hunt announced that, from 2025, electric vehicles will not be exempt from paying VED anymore. The exemption for electric vehicles from the expensive car supplement will also be abolished. The OBR estimated that abolishing these exemptions will raise £1.6 billion a year by 2027/28, as shown in HMRC’s Tax Information and Impact Note on VED.
Statutory provision for this is made by Clause 10 of the Finance Bill 2022-23. The Bill was published on 21 November 2022, and it passed its second reading took place on Monday 28 November 2022.The Committee of the Whole House and remaining stages are set to take place place on Wednesday 30th November, as announced by Leader of the House Penny Mordaunt in her Business Statement on 24 November.
Commentary
Whilst most attention has been given to other elements of the Autumn Statement, there has been discourse surrounding the announcements on VED. The BBC reported that Kia, Ford, and Nissan shared concerns surrounding the withdrawal of the exemption. Conversely, the Financial Times reported a representative of the RAC saying removing the exemption was unlikely to be a key element for consumers choosing a vehicle.
Electric vehicles and VED
The sale of electric vehicles (EVs) and low-emissions vehicles is steadily rising, as reported by the OBR as part of the March 2022 Economic and Fiscal Outlook. This means that, overall, VED receipts are falling as a share of GDP. The Government’s plan to ban the sale of new petrol and diesel cars by 2030 (announced in November 2020) means that, without any further reforms to the structure of the tax, VED receipts will dwindle. The OBR has said in its March 2022 Economic and Fiscal Outlook that “the largest single long-term fiscal cost of successful decarbonisation is the loss of revenue from motoring taxes”. The Transport Committee has recommended the Government to replace fuel duty and VED with a different tax, proposing road pricing as an alternative in an inquiry report (PDF). The Climate Change Committee has added in its 2022 Report to Parliament (PDF) that, although progress had been made on emission reduction, the Government had not outlined how it sought to raise an alternative source of revenue to replace VED and fuel duty.
Background and development of VED
Originally introduced in 1889, VED has undergone a number of significant changes in terms of the ringfencing (or lack thereof) of VED revenue, its administration, and its structure.
Originally, VED was charged according to weight of the vehicle (provision for this was made in the Locomotives on Highways Act 1896), then its horsepower (announced in the 1909 Budget).
The Labour Government in 1998 proposed that the rate of VED should not be a flat charge but based on a vehicles’ grams of carbon dioxide emitted per kilometre (gCO2/kg), to incentivise the purchase of more environmentally friendly vehicles. This was formally announced in the 1999 Budget. The Labour Government also introduced a one-off first year rate, also graduated according to a vehicle’s carbon emissions. This was included in the 2008 Budget (PDF).
Whilst the first year rate was maintained, changes to the structure of VED were announced in 2015 by the Conservative Government: from the second year on, VED was charged at a flat rate for all types of cars regardless of their gCO2/kg. An exemption applied to cars that emitted zero gCo2/kg (such as electric cars). The Government also introduced an additional rate (known as the ‘expensive car supplement’ of £310 for five years following the first year, on cars with a list price above £40,000. Detail of this was included in the 2015 Budget report (PDF).
Further reading
- The Library briefing on VED has detailed information about the background and development of the tax
- The Library briefing on electric vehicles and infrastructure provides further information on electric vehicles, including policies and investments employed by the Government to support their increased use.
- The Transport Committee inquiry on road pricing (PDF), published on 4 February 2022
- The Transport Committee inquiry on zero emission vehicles (PDF), published on 18 July 2021, and the Government response (PDF), published on 25 October 2021
- An article from the Guardian on road pricing is a helpful explainer on the wider issue of finding revenue to replace motoring tax revenue
- The explanatory notes to the Finance Bill 2022-23 (PDF – particularly Clause 10 which relates to VED)