Danger! Major new road tax ahead

Traffic Jam
Donald-Drysdale By Donald Drysdale for ICAS

24 August 2016

Anyone thinking of buying a new car should look carefully at changes being introduced from 1 April 2017, suggests Donald Drysdale.

Introduction

On hearing that road tax (officially known as ‘vehicle excise duty’) is to be revamped, you’d be forgiven for thinking that this is because motor manufacturers’ emissions figures have been discredited in the wake of the Volkswagen scandal.

You may think it strange – indeed, worrying – that we should be taxed on the basis of data which might be flawed. Couldn’t this put honest car manufacturers at a competitive disadvantage compared with those who’ve flouted the law?

The Volkswagen scandal

A bit of history, in case you’ve been on another planet for the past year.

The US Environmental Protection Agency discovered in September 2015 that the VW Group had built diesel cars with ‘defeat device’ software designed specifically to cheat emissions tests. This software had been used since 2005 to support VW’s aggressive diesel sales drive in the US, where restrictions on emissions of nitrogen oxides (NO and NO2, or collectively NOX) were much stricter than those in Europe at the time.

Subsequent investigations have shown that, under normal driving conditions, many makes of diesel car emit much higher NOX levels than was apparent from official testing. While this is explained in some instances by cheating by manufacturers, it also illustrates that laboratory tests produce very different results from those achieved in a ‘real-drive’ experience.

NOX vs CO2

Let’s understand the chemistry.  Nitrogen oxides occur naturally in the earth’s atmosphere, but increased levels caused by human activities such as agriculture, transport and industry can be 300 times more damaging than the equivalent amount of carbon dioxide.

Because their combustion processes differ, diesel engines produce less CO2 than petrol equivalents. However, diesel produces much more NOX than petrol, and more hazardous particulates (i.e. inhalable fine particle pollution) than petrol – you’ll have seen the black exhaust fumes from many diesel vehicles.

Back in 2001 the then Labour government set lower taxes on cars producing lower CO2 emissions. By ignoring official warnings that diesel vehicles emit more NOX and particulates, it encouraged motorists to buy higher-polluting diesel cars.

The EU has been slow to focus on diesel pollution. In 2014, more than half of Europe’s new cars were diesel. In every member state except the UK, fuel tax on diesel is lower than that on petrol. Increasing pressure from Brussels can now be expected – whether we stay in the EU single market or develop a new relationship with it.

Changes to road tax

Despite concerns about diesel pollution, the reform of road tax from 1 April 2017 ignores NOX and particulate pollution and sticks firmly with CO2 as its measure of environmental harm.

The current structure of road tax, based on official tests assessing CO2 emission levels, was introduced in 2001 when average UK new car CO2 emissions were 178 grams per kilometre (g/km). The ‘Band A’ threshold of 100 g/km, below which cars pay no road tax, was introduced in 2003 when average new car emissions were 173 g/km.

Since 2003, to meet EU emissions targets, average new car CO2 emissions have been cut to 125 g/km. Thus an increasingly high proportion of ordinary cars now fall into the zero- or lower-rated bands. This trend weakens the environmental influence of road tax, and is set to continue as manufacturers strive to meet further EU targets of 95 g/km set for 2020.

For cars first registered from 1 April 2017 onwards, first year road tax will still vary according to CO2 emissions – but on a more progressive scale to encourage take-up of the cleanest cars. As examples, it will be £500 where CO2 emissions are from 151 to 170 g/km, and a whopping £2,000 where they exceed 255 g/km.

Surprisingly, road tax for subsequent years will be at a standard rate of £140, except that none will be payable on zero-emission cars. Other cars with a list price above £40,000 will attract a supplement of £310 on their standard rate for the first five years that it’s payable, even if their emission levels are very low.

If you’re unsure whether or not to replace your existing car, note that all cars first registered before 1 April 2017 will remain on the current road tax system, which (we are told) will not change.

Under the new system, only zero-emission cars will escape the first year and standard road tax charges. Those with emissions between 1 and 50 g/km will face a £10 charge in the first year and the £140 standard charge annually thereafter, compared with the nil road tax currently due on any car with emissions up to 100 g/km. Those wanting to save the environment by choosing a low emission car will no longer avoid a sizeable road tax bill.

The added sting in the tail – the annual supplement of £310 for five years on cars with a list price over £40,000 (excluding road tax) unless they have zero emissions – amounts to a painful penalty of £1,550. This is an extra tax charge, unrelated to pollution, to ensure that those buying the most expensive cars make a larger contribution.

Paradoxically, the government thinks the current road tax system unfair because owners of newer cars pay little or no road tax while owners of older cars generally pay much more. The new standard rate of £140 a year seeks to correct this, but does this make sense? Given the likelihood that engineering advances in pollution control will continue, perhaps clean air targets would be met more swiftly if the structure of road tax encouraged the replacement of older, higher-polluting cars.

Are further changes afoot?

Perhaps it is time for the government to consider re-structuring road tax to focus more specifically on making high-polluting diesel vehicles less attractive. This might take into account assessed levels of NOX and particulate emissions as well as CO2 – assuming, of course, that official testing proves effective.

Fuel duty rates are another tool that might be used to discourage diesel usage. But this might be problematic since the road haulage industry and public transport are heavy users of diesel fuel – and, incidentally, heavy polluters.

Other possibilities exist. A government-sponsored scrappage scheme for diesel cars has been suggested. Increasingly, local authorities may curb the use of high-polluting diesel cars in designated urban areas.

Company car tax benefit-in-kind rules may also be reformed, and possible changes are outlined in a Treasury consultation paper published on 10 August. CO2 emissions will continue to be the main factor determining company car tax rates, but a secondary measure based on ‘zero emission miles capability’ might be used too.

In the meantime the 3% diesel supplement, which ensures that CO2-based benefits are higher for diesel cars than for petrol, is set to continue only until 2021. By then, the government says, EU-wide testing procedures will ensure that new diesel cars meet air quality standards even under strict real world driving conditions. Really?

Article supplied by Taxing Words Ltd

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