Does it still pay to be green on Britain’s roads?

What’s changed?

On April 1^st 2017, the UK government introduced changes to Vehicle Excise Duty (VED).

VED has undergone several evolutions in recent years. In 2001, VED was reformed to reflect CO₂ emissions rates per kilometre, with 13 bands of increasing CO₂ emissions incurring increasing VED costs. The scheme was further reformed in 2013, to introduce separate first year rates which further penalised purchasers of high CO₂ emitting vehicles.

Since April of this year, the VED has been more overwhelmingly reformed:

• The CO₂ emissions bands have been changed, in particular with the creation of more granular bands at lower emissions levels.
• Different first year rates have been kept, but have been increased across the board, becoming even steeper for higher CO₂ emitting vehicles (with hybrid cars receiving a £10 discount on this rate).
• Standard costs applying after the first year have been standardised at £140, with the exception of hybrid vehicles which are charged £130 and electric and hydrogen vehicles which attract no charge.
• An additional surcharge for vehicles with a list price exceeding £40,000 of £310 per year for five years starting in the second year the vehicle is taxed.

The old and new schemes are different emission rates are compared in the table below. We consider the cost over six years as the average period for which a new car is owned.[1] Note that this table excludes the £310 premium paid under the new scheme for vehicles with a list price over £40,000.

Table 1: Comparison of old and new VED schemes

• Old Scheme (purchases before 1^st April 2017) (b) New scheme (purchases from 1^st April 2017)

What might all this mean?

By comparing the old and new VED systems, there are a number of hypotheses that can be made about the impact of the new scheme:

It should encourage greater purchases of zero emission (electric and hydrogen) vehicles – the logic is that as advances in technology allow producers to reduce average CO₂ emissions, tax incentives should also change to encourage uptake of such vehicles. This scheme should encourage greater take-up of fully electric or hydrogen vehicles over low emitting vehicles more generally, as previously any vehicles with emissions up to 100g/km had been fully exempt, but now only vehicles with zero emissions are fully exempt (i.e. electrics).

But discourage further uptake of hybrids – due to the introduction of more granular bands at lower emission levels, lower emitting vehicles, e.g. hybrids, now face higher VED rates. A 50g/km vehicle would previously have been charged no VED, but now incurs a cost of £650 over six years (the corresponding figures for a 110g/km vehicle are £100 and £740 respectively).[2] This could damage the uptake of hybrid vehicles. A Toyota Prius for example, which is one of the country’s top selling hybrid vehicles and emits 70g/km, would see VED cost over a six year period rise from nothing to £665 (£15 in year one and £130 thereafter).

This may be of particular concern, given that for some consumers a purely electric car may not suit their lifestyles, perhaps due to the limited range, power and/or lack of charging points.[3] For these consumers a hybrid may represent a good compromise between practicality and green credentials, but the new VED scheme reduces the financial attractiveness of a hybrid vehicle. This seems a move against the general direction of the automotive industry, where the majority of manufacturers now either have, or will soon have, a hybrid vehicle in their range (including more luxury brands as we shall come onto discuss).

Higher polluting vehicles are no longer so heavily penalised, which may encourage uptake – new vehicles emitting less than 165g/km will pay more VED under the new scheme (with the exception of zero emitters). In percentage terms, the increases in VED rates are particularly marked for these more economical vehicles, some of which could see costs increase almost nine-fold over the course of six years. For heavier polluting vehicles, setting aside the £40,000+ premium, the absolute cost of VED fill fall (specifically for any vehicle emitting over 186g/km). Thus uptake of higher polluting vehicles may become more financially attractive than before, encouraging growth in these emissions bands at the expense of lower emission bands.

The development of a higher end electric (or hybrids) market may be curtailed – due to the introduction of the new higher VED rate for vehicles with a list price over £40,000, this may discourage growth of higher end electric vehicles. A Tesla Model S, for example, which costs in excess of £65,000 would have attracted no VED under the old system, is now liable to five annual payments of £310 starting in the second tax year, equating to £1550 over the course of six years of ownership.[4] It would therefore attract a higher charge than a BMW M240i, which at around £38,000 and CO₂ emissions of 189g/km, would cost £1,500 in VED over six years (and cost only £190 less a year than a V8 Ford Mustang which emits almost 300g/km).[5]

The UK’s car rental sector may also suffer – the changes could have a significant detrimental impact on the UK rental sector, due to the significant increase in first year VED rates. Average ownership in the rental sector is nine months and, since vehicle owners are also no longer able to recoup any outstanding portion of VED paid when the vehicles is sold, this means that purchases will be subject to at least one year of duty. Oxford Economics’ estimate that this could see average duty paid over nine months of ownership to rise almost fivefold from the current level of £36 to £170.[6] They predict that this will result in a sharp decline in new vehicle purchases by the rental sector, with detrimental knock-on impacts on jobs and tax revenues, as well as encouraging the rental sector to hold onto less efficient vehicles for longer.

The new VED system is still in its infancy; it will be very interesting to see to what extent these predictions are borne out in reality over the coming years

[1] See: http://business.time.com/2012/02/23/drivers-upgrading-to-new-cars-at-slowest-pace-in-years/.

[2] The figures under the new scheme take into account the £10 annual reduction hybrid cars receive against the first year and standard rates.

[3] See: http://www.autoexpress.co.uk/best-cars/86211/best-hybrid-cars-sale.

[4] See: http://www.autoexpress.co.uk/car-news/consumer-news/88361/tax-disc-changes-everything-you-need-to-know-about-uk-road-tax/page/0/1.

[5] Under the old scheme, a V8 Ford Mustang would have cost almost £600 more per year in VED (over six years) than a Tesla Model S, compared with only £190 per year under the new scheme – a marked change in incentives.

[6] Oxford Economics (2017), “The Economic Impact of Changes to Vehicle Excise Duty”.